Big pensions are healthiest they’ve been since 2008 financial crisis

Large corporate US pension plans haven’t looked this good since before the 2008 financial crisis – and that’s good news for workers and employers.

The “funded” status of a pension is a key indicator of its health. It is a measure of plan assets versus liabilities (how much money the plan needs to pay for future income). Pension plans that are less than 100% funded do not have enough cash on hand to meet future obligations to retirees.

The 100 largest US public company pensions were 99.6% funded at the end of the year – the healthiest they have been since September 2008, according to Milliman, a consulting firm. This is up from 90.3% at the end of 2020.

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The story is similar among a broader group of large Fortune 1000 companies. Their pensions were 96% funded, on average, last year, according to Willis Towers Watson, a consulting firm.

It’s the highest level since late 2007 and a “sharp” rise of 88% in 2020, according to its analysis.

The momentum — largely the result of stock and bond returns — offers some relief to retirees and workers who expect to live on their retirement income, experts said.

“The retiree will be more comfortable, there’s something to back up the promise,” said Philip Chao, pension plan consultant at Experiential Wealth, based in Cabin John, Maryland.

The steady increase in life expectancy and the rate of retirement of baby boomers have posed challenges for pension plan managers. Plans need to ensure they have enough funding to pay checks to more people for a longer period of time.

However, there are rules and mechanisms in place to protect retirees.

The Pension Benefit Guaranty Corp., a federal agency, offers financial support if a company cannot pay promised benefits – if an employer goes bankrupt, for example. However, the PBGC caps these guaranteed payments, meaning some retirees might receive less than they expected.

Many companies have moved away from retirement plans to 401(k)-style plans, which shift the responsibility of building up a nest egg to workers. Others have offloaded their pension obligations onto insurance companies.

The rapid improvement in pension funding in 2021 is largely due to strong equity returns and higher bond yields, according to Jennifer Lewis, senior director of retirement at Willis Towers Watson.

The S&P 500 index rose 27% in 2021, its third consecutive positive year. US government bond yields ended 2021 at 1.5%, after starting the year below 1%; yields on investment grade corporate bonds also rose.

This had a two-pronged effect: stock market returns supported pension assets, while bond yields reduced future pension liabilities.

“Bonds did well in the low interest rate environment, and stocks did even better,” Chao said. “That’s what’s happening.”

The rebound in corporate pensions is a sharp reversal from 2008, when pension funding among the Fortune 1000 fell precipitously, to 77% from 107% the previous year. (U.S. stocks lost about 38% that year.)

“We’ve certainly seen volatility in the past, and we still expect to see that volatility in the future,” Lewis said of pension funding.

Some pension plan managers have turned to more alternative investments like private equity and hedge funds since the financial crisis, according to Boston College’s Center for Retirement Research.

They are generally riskier than traditional stocks and bonds, but can offer higher yields or provide diversification benefits, the Center said.

Public pensions more than doubled their allocation to alternatives from 2005 to 2015, rising from 9% to 24%, according to the Center.

Given the current health of the plan, companies may choose to shift some of their portfolios to less risky investments like bonds to lock in recent gains, Chao said.

Nor does improving large business plans take into account the health of small business pension plans and public plans for municipal workers. However, they’ve also likely improved given the similar dynamics governing those plans, Lewis said.