- Pension plan funding has steadily improved since the Great Recession, according to Aon data.
- A pension’s so-called funding ratio is one measure of the health of the plan. This is a comparison of the plan’s assets and the future payments the plan must make to beneficiaries.
- Experts say a better funding situation will make it more likely that companies will continue to provide pensions, reducing the risk that some workers’ benefits will be cut.
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Pension plans at America’s largest companies are at their healthiest levels in more than a decade, which is largely good news for workers who participate in these plans, retirement experts said.
The average pension “funding ratio” for publicly traded companies included in the S&P 500 stock index was 102% as of Sept. 21, according to data tracked by financial services firm Aon. This is the highest level since at least the end of 2011, when the ratio was about 78%.
The funding ratio is one way to measure the soundness of a pension. Compare company pension assets and liabilities. In other words, it evaluates the funds a pension has on hand and the funds the company needs to pay future pension income to workers.
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A funding level of 100% or higher means that assets are currently on hand to meet future obligations.
“This is a really good thing,” Aon’s global chief commercial officer Byron Beebe said of the current funding levels. “It’s the highest level it’s been in a really long time.”
Of course, according to the American Academy of Actuaries, pension funds are only a “financial snapshot of a single moment in time.” It may change based on factors such as the health of the U.S. economy. Each scheme is unique, which means that funding status is not the only measure of a pension’s health, the paper said.
Private sector pensions have become rarer in recent decades as companies replace them with 401(k)-type plans.
Pension plans are also known as “defined benefit” plans because a worker’s future benefits are defined according to a formula based on factors such as years of service and salary.
At its peak in 1983, there were 175,000 defined benefit plans in the private sector, according to U.S. Department of Labor data. By 2020, that number had fallen to about 46,000.
But many of those plans have been “frozen,” meaning workers can no longer receive benefits.
As a result, fewer “active” members continue to qualify for pension benefits. In 1975 he had 27.2 million active participants. By 2019, that number had more than halved to 12.6 million, according to the Congressional Research Service.
According to the Ministry of Labor, there are approximately 32 million people enrolled in corporate pension plans, including active participants and those who have stopped receiving benefits.
With a healthy pension plan, companies with active plans are more likely to keep them and not terminate or freeze them, Beebe said.
This is really good. It’s really the highest price I’ve seen in a long time.
Aon Global Chief Commercial Officer
In extreme cases, a lack of funding could lead to benefits being cut, experts say.
Companies that are behind on pension payments can transfer their obligations to the Federal Pension Benefit Guaranty Corporation, which acts as a financial backstop to guarantee pension benefits.
However, beneficiaries are not guaranteed to receive the full amount promised. That’s because PBGC guarantees benefits up to a limit based on age. Most pensioners will not be affected by this restriction, but those who are will see their benefits reduced, according to the PBGC.
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After the 2008 financial crisis, corporate pension funds slumped.
John Rowell, a partner at pension consulting firm October Three, said the recent improvement was largely due to three factors: rising interest rates, strong stock prices and policy changes in how some companies fund their plans. Ta.
Because of the way pension liabilities are calculated, higher interest rates on corporate bonds generally mean companies don’t have to contribute as much money to pensions now to meet future benefits, Rowell said. Stated.
Lowell said the premiums companies pay to PBGCs also generally increase with the level of a plan’s underfunding, and their premiums have increased significantly. As a result, Rowell said, companies are becoming more proactive in contributing to plans to ensure they are fully funded.
Lowell said that apart from some periods, such as 2022, asset classes such as equities have “continued to perform solidly for more than a decade” and are driving up plan assets. The S&P 500 fell more than 19% in 2022, its worst level since 2008.
Aon’s Beebe said companies are also adopting investment strategies that are less volatile due to the vagaries of investment markets. Simply put, they use a portion of their portfolio to buy bonds whose income matches their future pension promises, increasing predictability, he said.
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