Equity gains and rising rates buoy US pension funds

New York cabA combination of stock market gains and rises in interest rates pushed the average funding level of top US corporate pension schemes to 95% last year, its highest level since 2007.

The collective deficit of pension schemes sponsored by companies in the S&P 1500 index plummeted 80% over the year to $103 billion (€76 billion), according to estimates by investment consultancy Mercer, which predicts 2014 will be “a big year for risk transfer strategies”.

“December was yet another present under the tree for pension plan sponsors, who were already having a great year with regards to funded status improvement,” says Jonathan Barry, a partner with Mercer’s retirement consulting group.

Funding levels improved steadily over the year, says Barry, helped by stock market gains that saw the S&P 500 index rise 30%. Rising interest rates were perhaps even more significant, because they lowered the estimated value of pension scheme liabilities.

Richard McEvoy, leader of Mercer’s financial strategy group, says schemes are taking advantage of their improved positions to lock in their gains with derisking strategies.

“Many of our clients have employed glidepath strategies where they systematically derisk their plans as funded status improves; we saw well over 100 funding level triggers hit during 2013 alone,” he says.

“In addition, 2014 is looking to be a big year for risk transfer strategies such as annuity buyouts and voluntary cashouts to former employees, as improving conditions make these options much more feasible than before.”

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