The annual SEC filings of the corporations that sponsor the U.S.’s largest pension plans (we call them the $20 billion club) provide us with an annual snapshot of the state of corporate pensions across America. The latest data shows that, following a strong year in 2013, 2014 saw pension funding take a step back.
As highlighted by the chart above, the main reason for this was “actuarial losses.” Most years, actuarial gains and losses can be traced largely to changes in interest rates: falling rates lead to higher values being put on the liabilities (rising rates lead to lower liability values.) 2014 added a new twist, though: a re-basing of liability values to reflect updated assumptions about life expectancy: almost all of the corporations in the $20 billion club used updated mortality assumptions, largely based on new tables (known as RP-2014) that were recently published by the Society of Actuaries. This had the effect of adding some $29 bn to the combined liabilities, turning an already negative year into a significant setback.
One consequence of adopting new mortality assumptions in a year in which interest rates fell has been that the combined pension liabilities ended 2014 bigger than they had ever been before, exceeding the previous high (of 2012) by some $23 bn. This had seemed so unlikely to happen that we had started to refer to that previous high as “peak pension.” But, against the odds, pension liabilities have re-peaked.
Given this unexpected turn of events (and the continued decline in interest rates in the first part of 2015), we offer no predictions as to whether 2014 represents peak pension or whether liability values will go higher still. The main source of uncertainty, as usual, is actuarial gains/losses: the combined effect of the other variables (service cost; benefits; interest cost; other) is relatively stable and can be expected to push the combined liability value down by around $5-10 bn (or more if there is significant risk transfer activity).
As this blog has covered previously, there are several notable trends among U.S. pension plan sponsors in general (and the $20 billion club specifically), ranging from contribution stabilization (a.k.a. funding relief) to the impact of PBGC premiums to plan closures and pension risk transfer. These are all likely to continue to be major topics in 2015. But I shall close with an observation that may surprise many readers: even following six years of strong asset returns (the Russell 3000 index returning 17.6%% a year over the period, or 165% in total), the excess of pension liabilities over pension assets among the 19 corporations that form the $20 billion club was $47 bn larger at the end of 2014 than it was at the end of 2008. This is proving to be a tough hole to climb out of.