A new report from Russell Investments highlights the fact that 2013 was a very good year for major U.S. pension funds. At year-end 2012, the total deficit of the “$20 Billion Club” (a group of 19 corporations who represent around 40% of the pension assets and liabilities of all U.S. public companies) was $220 billion, That huge deficit was reduced by more than 40% in 2013, with the $20 Billion Club net deficit dropping to a much more manageable $114 billion.

2008-2012 a “disaster” for pension funds

Bob Collie, Chief Research Strategist at Americas Institutional begins the report with an historical overview of U.S. pension fund performance over the last five years. “2008 was a disaster for the $20 billion club: market turmoil turned a combined pension surplus of $61 billion at the end of financial year 2007 into a deficit of $136 billion by the end of 2008. For the next four years, things only got worse. Plan sponsors increased their contributions and equity markets performed well, but falling interest rates meant that assets could not keep pace with liability growth. By the end of 2012, the combined pension deficit had reached $220 billion”

Major turnaround in 2013

Collie goes on to describe the factors involved in the major turnaround for pension funds in 2013. “Things changed at last in 2013, as the long-anticipated reversal in interest rates finally arrived. The median discount rate used to value U.S. plan liabilities –which had fallen from 6.4% to 4.0% in the previous four years – rose to 4.89%. This alone accounted for a gain of some $69 billion. Helped by another strong year on the asset side and plans sponsor contributions, this meant that over 40% of the deficit was wiped out: the net shortfall of assets below liabilities fell by some $106 billion.”

Pension funds

Details on gains

The report also emphasizes that investment returns as well as the increase in the discount rate contributed to the banner year for $20 Billion Club pension funds. “The increase in the discount rate was the single biggest source of gain, but not the only one. Investment returns – which totaled almost 9% – comfortably outpaced the interest cost on liabilities. Contributions from plan sponsors were around $27 billion (including AT&T’s $9 billion preferred-stock contribution), which was almost double the value of new benefit accruals.”

Collie also mentions that only Bank of America Corp (NYSE:BAC) currently “has worldwide pension assets in excess of liabilities,”but that several other members of the club are getting close.