Strong stock market gains and slowly rising interest rates have left corporate pension plans in their healthiest state since the recession hit, a development that analysts say creates an opportunity for many firms to off-load them.
The funding level for the nation’s largest corporate pension plans increased sharply in 2013, with the ratio of assets to liabilities rising from 77 percent at the end of 2012 to 93 percent at the end of 2013, according to Towers Watson, a benefits consultancy. That has left corporate pensions in their best shape since 2007, when the average funding level for Fortune 1000 firms offering tradition pensions stood at 106 percent.
The improved finances offer relief to corporations that have been spending tens of billions of dollars in recent years to keep their pension funding levels in compliance with federal regulations.
But rather than just assuring the future of the shrunken number of traditional pension plans that make retirees guaranteed payments for life, the improved funding levels also make it more feasible for more firms to shed pension obligations altogether. Firms can do that either by offering lump sums to workers or to transfer the future liabilities — and the money set aside to meet them — to insurance companies that convert them into annuities.
“From a financial management perspective, as the funded ratios get closer to 100 percent, it becomes feasible to do things you couldn’t three or four years ago,” said Alan Glickstein, a senior retirement consultant at Towers Watson.
The percentage of private-sector employees who are covered by traditional pensions has decreased by about half since the early 1990s, to just 18 percent last year, according to the Labor Department.
The decline in traditional pension coverage, coupled with inability of many Americans to save for retirement outside of pension plans and the ever increasing cost of medical care, has contributed to growing concern that a growing number of Americans are at risk of downward mobility when they enter retirement.
In recent years, some firms — worried about the long-term financial responsibility of paying for pensions — have moved to get the liabilities off their books. In recent years, Verizon Communications transferred $7.5 billion in pension obligations to Prudential Financial. The move came after General Motors paid Prudential to assume $25 billion of its pension risks.
With private firms facing tighter government rules to keep pension funding levels high as well as sharply higher premiums for government pension insurance, that trend is showing no signs of reversing. Add to that the growing volatility of financial markets over the past decade and a half, there is ample incentive for firms to drop pensions, many analysts say.
“The improved funding environment will provide pension plan sponsors with some intriguing opportunities for 2014,” said David Suchsland, a senior retirement consultant at Towers Watson. “We expect the actions we’ve seen among companies to de-risk their pension plans over the past several years will accelerate as funding levels continue to improve.”
Now, analysts say, with pension fund balance sheets healing, companies could be tempted to shed pension liabilities because as funding levels improve, the cost to firms of transferring pension liabilities to insurance companies or buying out retirees with lump sums goes down.
This year “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,” said Richard McEvoy, head of the Financial Strategy Group for Mercer Investment Consulting.