The largest 250 defined-benefit (DB) corporate pensions saw their aggregate funded status increase 15% in 2013, rising from 77% to 92% and recovering most of the ground that was lost during the crisis, and as long as the economy continues to grow pensions will benefit in turn.
DB pension underfunding drops to $166 billion
“The improvement in aggregate funded status of the largest 250 corporate DB pensions in 2013 represented one of its best twelve-month performances of the past ten years,” writes Citi analyst Martin Bernstein. Underfunding was reduced by $320 billion to $166 billion and 29% of assets are in pension plans that are completely funded. The last time the funded status was this high was during the onset of the crisis while it was still in free fall.
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
“Assuming no rebalancing (except where plans reported intra-year), the equity/debt allocation went from approximately 39%/39% to 45%/34%. With this as our backdrop, we look forward to what 2014 may bring for US corporate DB plans,” he writes. The Citigroup Pension Liability Index has also recovered since the end of 2012, and could reach pre-crisis levels in 2015.
2014 could see 100% aggregate funded pensions
Since the improvement in 2013 was driven by rising equities, it makes sense that Citi’s bullishness on equities in 2014 translates to continued bullishness on corporate DB pensions. Bernstein’s base case is that the US has 3% GDP growth and aggregate funded status increases to 96%, reducing underfunding in the top 250 DB pensions by $92 billion to $74 billion by the end of the year. Under this scenario, the portion of assets in fully funded pensions rises to 37% and 74% of all corporate DB pension plans are funded to at least the 90% level.
His upside case (around 6% GDP growth) would lead to pensions being fully funded in 2014, and of course an economic slowdown, somewhere in the range of 1-2% GDP growth, would hurt DB pension funding levels, and an unexpected shock would have severe consequences, as you’d expect.
Ironically, the best case scenario for DB pensions is one with solid economic growth but a collapse in confidence that the Fed can keep rates under control. Bernstein estimates that such a scenario would boost funding levels to 107%.