The funded status of pensions is indicative of the health of a pension plan, and Aon data shows that it has gone up steadily since the Great Recession. This is beneficial to companies and workers alike, as it means there is less of a chance of companies cutting benefits and reduces the risk of financial losses for the retired.
According to data tracked by Aon, pension plans for major U.S. companies are in their most robust condition in over a decade, which is largely good news for participants. The average pension "funded ratio" among those in the S&P 500 was recorded at 102% as of September 21, the highest level since 2011 when it came in at 78%. This calculation reveals how much money a pension has on hand to cover its future obligations compared to the funds needed to pay for later pension income of workers. A funding level of 100% or more would mean that the plan has the assets necessary to meet its commitments. Byron Beebe of Aon commented that this a welcome development, however the American Academy of Actuaries notes that the ratios can be contingent on changes in the U.S. economy and that the situation may vary depending on the individual plan.
Over the years, pension plans in the private sector have become less common as firms have switched to 401(k)-style plans. These pension plans, also known as "defined benefit" plans, determine the future benefit of a worker with a formula based on their tenure and salary. According to U.S. Department of Labor data, there were 175,000 such plans at their peak in 1983. However, by 2020, only about 46,000 remained.
A large number of plans have been "frozen" which means that workers no longer receive any benefits from them. Consequently, the number of "active" participants who are still earning pension credits has gone down drastically since 1975 when it was 27.2 million and is currently 12.6 million according to the Congressional Research Service. The Department of Labor reports that the overall amount of participants in corporate pensions is around 32 million, taking into account both active participants and those not accruing any sort of benefits. Beebe stated that if a pension plan is properly functioning, it increases the chance that companies with active plans won't terminate or freeze them.
If not adequately funded, it is possible for there to be a decrease in the benefits provided. Companies with problematic pension funds can turn to the Pension Benefit Guaranty Corporation who will provide financial support. While this does guarantee that a pension is provided, there is a caveat as the PBGC only provides benefits up to a certain level depending on age. This limitation does not often affect individuals, but it can lead to a decrease in the amount of benefit a person would have received.
After the 2008 financial crisis, corporate pension funding experienced stagnation. The current revival is largely due to three reasons: increases in interest rates, excellent stock market performance, and policy modifications concerning company pension plans, explained John Lowell, November Three partner and pension advisor. Owing to how pension liabilities are computed, a higher interest rate on bonds usually indicates companies do not need to put in as much money into their pensions now to meet future benefits, Lowell stated. In addition, the premiums companies have to pay to the PBGC (Pension Benefit Guaranty Corporation) amplify when there is underfunding of the plan, and these premiums have significantly augmented, Lowell went on. Thus, companies are more resolute about making pension plan contributions to secure they are totally funded, Lowell continued. In addition, the longest lasting positive stock market run in 10-15 years has boosted pension plan assets. However, the S&P 500 dropped 19% in 2022, its most extreme descent since the 2008 crisis. Companies as well have begun to use investment strategies that are not quite as vulnerable to investments market movements, as Beebe from Aon clarified. In a straightforward sense, a portion of the portfolio is invested in bonds that provide an income matching the future pension benefits, consequently creating more dependability, he added.
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