Corporate Pension Plans Facing “Double Whammy”, According to PwC Report

Corporate pension plans faced a “double whammy” of low interest rates and higher mortality rates in 2014, according to a report from PricewaterhouseCoopers.

That combination pushed funding levels lower by 7 percentage points in 2014, as compared to 2013.

From the Wall Street Journal:

Higher mortality rates combined with low interest rates have plans in the red, according to a recent PricewaterhouseCoopers LLC study. The median funding level for large-company retirement plans in 2014 fell to 83%, compared with 90% in 2013. Those plans were 100% funded in 2007.

Add low interest rates to the mix and it’s a “double-whammy” for pension funds 2014, said Ken Stoler, partner for PwC’s compensation and benefits accounting advisory unit. Lower interest rates increase the present-day value of future pension obligations.

Part of the downturn for pension plans was offset by stock market gains, he said. PwC analyzed annual reports from 100 large companies.

“It’s a little bit hard to predict how these things are going to look in the future,” Mr. Stoler said. “Plans that are poorly funded today might look healthy in two to three years.”

An update to mortality estimates by the nonprofit Society of Actuaries is forcing companies to estimate longer lifespans for retirees. That increases pension obligations, because companies will have to pay benefits out to retirees for more years.

The average 65-year-old American woman is now expected to live 88.8 years, up from 86.4. Men who are 65 are expected to live 86.6 years, up from 84.6, according to the estimates announced in late 2014.

The PwC report looked at 100 large companies.

If you zoom out and look at funding levels for S&P 1000 companies, the picture is roughly the same: the aggregate funding level of S&P 1000 companies sits at 84 percent, according to Mercer.

Photo by Sarath Kuchi via Flickr CC License