Pension Risk
Many pension funds across the globe were in dire straights during and immediately after the financial crisis of 2008. That said, after a year or in crisis mode, the pension plans of most major firms bounced back nicely in the few years following the crisis. However, it appears that 2013 may have been the high water mark for the pension fund recovery, as the overall financial health of U.S. corporate pensions slipped in 2014 (and is not looking good for 2015).
The November 2015 version of the Towers Watson Pension Risk Index highlights that 2014 was a less than stellar year for U.S. corporate pension funds, with a 7% drop in average funded status and a .1% increase in pension risk among Fortune 1000 pension plans.
Overview of results for Towers Watson 2015 pension risk survey
The Towers Watson Pension Risk survey points out that following a rise from 74% in 2012 to 88% in 2013, the average funded status for the pension plans of Fortune 1000 firms dropped to 81% in 2014. For firms who have been in the Fortune 1000 for the last three years, the median Pension Risk Index moved up a bit in the last 12 months, from 1.2% to 1.3%. Median PRI scores had improved last year, decreasing notably from 1.8% to 1.2%.
The TW study focuses on a consistent sample of 435 pension plan sponsors in the 2013, 2014 and 2015. The median PRI score declined from 1.8% in 2013 to 1.2% in 2014 and then inched back up to 1.3% in 2015 for this group.
Close to 25% of these pension fund sponsors had PRI scores of less than 0.5% in 2015, down slightly from 27% in 2014 (see Figure 1). A score under 0.5% suggests that the adverse financial outcome seen in the model would not be a significant problem for the firm.
PRI scores were 10% or higher for 12% of these plans in 2013, which means that adverse market conditions could cause a pension loss of more than 10% of market capitalization, with the concomitant possibility of a major disturbance to business operations. PRI values were 10% or higher for only 5% of these plans in both 2014 ad 2015.
The slight move up in 2015 PRI scores over the last year is mainly due to a combination of offsetting events. Reasonably good equity returns boost the market cap of Fortune 1000 firms by 9%, improving their overall financial position for 2014. However, this good news was more than offset by lower interest rates and new mortality assumptions that increased plan obligations.
