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Jan 7Jeff Matthews

Pension plans end 2013 with great earnings and improved funding levels

Jan 7Jeff Matthews

A recent press release[1] by Mercer highlights the great year that pension plans had in 2013.  Gains were led by the nearly 30% increase in the S&P 500 index.

The other less understood component is the change to the discount rate.  Pension plans measure the size of the future liabilities by discounting the projected payments to reflect the present value of those liabilities.  According to Mercer, “The Mercer Yield Curve discount rate for mature pension plans rose almost a full percent over the year from 3.71% to 4.69%.  For a typical pension plan with a plan duration of 12 years, this means liabilities will be about 12% lower than they otherwise would have been using last year’s discount rate.”[2]

The funded ratio (assets divided by liabilities) improved to 95%, a 21% improvement over 2012.   This improvement changed the collective deficit to $103 billion at December 31, 2013 from an estimated deficit of $557 billion at December 31, 2012. 1

As 2013 earnings are released, look for commentary concerning these gains.  For companies with significant pension costs in 2013, this improvement will result in improved net earnings in 2014.  Richard McEvoy, leader of Mercer’s Financial Strategy Group, stresses that “2014 is looking to be a big year for risk transfer strategies such as annuity buyouts and voluntary cashouts to former employees, as improving conditions make these options much more feasible than before.”1

 


[1] 2013 the best year on record for us pension gains; sponsors now acting to protect their winnings.  January 3, 2014, http://www.mercer.com/press-releases/US-pension-funding  (accessed January 5, 2014).

[2] Mercer pension discount yield curve and index rates in the US.  January 2, 2014, http://www.mercer.com/pensiondiscount (accessed January 5, 2014).

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