Pension Funding - Will Your Plan Provide Benefits?

April 29th, 2013
Pension Funding - Will Your Plan Provide Benefits?

Pensions are promises made by the employers to pay to their workers a set of benefits after they retire. The U.S. GAAP (Generally Accepted Accounting Principles) requires that these promises be present in a company's financial statements as a liability. The pension fund deficit continues to grow for the one hundred largest corporate pension plans according to the Milliman report (issued by an actuarial consulting firm). Furthermore, despite the record contributions of $61.5 billion from the one hundred largest companies, there will still not be enough money to offset pension liabilities. The goal of this article is to provide information regarding the status of the pension fund deficit, the assumptions that affects the funding status, and the factors that affects the corporate pension measurements.

            According to the Milliman report, decreasing discount rates are the cause for the increasing pension deficits. The discount rates for the year 2012 fell to a record low of 4.02%, a decrease of 0.76%, which forced the 2012 deficit to be $388.8 billion. This represents an increase of $61.5 billion from the year 2011. The pension expense for these companies was also at a record high. The total pension expense for 2012 was $55.8 billion, an increase of $17.8 billion from the year 2011. The investment return among the largest plans increased from 5.9% to 11.7%, which was almost double from the  year 2011 . The largest corporations have already announced their plan to make a contribution to the fund relief. AT&T and Ford have announced their plan to contribute $9.5 and $5.0 billion, respectively, for 2013. Boeing, Chevron, Exxon-Mobil, and Lockheed-Martin have indicated that they will contribute at least $1 billion to their pension funds.

             The calculation of the pension liability contains various factors. The calculation includes the expected salary at retirement of the current employee and the number of years he or she has served. The calculation also accounts for how long retirees are likely to live . The discount rate also plays a crucial role in the calculation. The higher the discount rate the lower the pension liability. The pension funding status is affected by the investment performance of the plan asset. They have an inverse relationship: the higher the return on the invested securities, the lower the pension liability.

Despite the anxious report of 2012, 2013 already looks like a good start for the corporate pension fund. Standard & Poor's 500,  a stock market index based on the market capitalization of 500 leading publicly traded companies,  has gained a return of 9.56% from December 31, 2012 to April 22, 2013. A partner in Mercer, retirement consulting firm, stated that the pension obligation has decreased back to the obligation of 2011. Nonetheless, he is concerned about the volatility of the stock market, which could pull the pension obligation back on balance to the 2012 amount. The Milliam firm found that a 0.27% increase in the discount rate and the increase in the stock market decreased the pension liabilities for the hundred largest pension funds in 2012 by almost $106 billion.

Federal Reserve said in October that the interest rate will remain low, near zero, until mid-2015, which means the discount rate will not fluctuate significantly. If the market continues to grow, then the deficits will soon be minimal. However, the slowing economic growth of the U.S, the holding interest rate by Fed, and the steady increase in the unemployment rate may make the market volatile and cause pension liabilities to increase.