Moody’s: Corporate Pension Funding Set to Improve Over Next 3 Years

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A new report from Moody’s projects that non-financial corporate pension funds in the U.S. will undergo significant funding improvements over the next three years.

The report notes that if interest rates rise faster than the projection, plans could become 100% funded in as soon as 18 months.

From Moody’s:

“Since 2008, pension benefit obligations have increased significantly, with discount rates being a major contributing factor,” said Wesley Smyth, a Moody’s Vice President – Senior Accounting Analyst. “Despite asset returns averaging an impressive 10% per annum since 2008, we believe the funding status of US non-financial corporate pension plans will end this year at 78%.”

If interest rates move as Moody’s expects and assuming consistent asset returns, pension plans could achieve fully funded status in as little as 36 months, according to the report, “Pension Underfunding to Shrink in Next Three Years.” The rating agency expects Aa corporate interest rates will begin to increase in December, reaching 6% by 2019. If rates increase more than Moody’s expects, plans could be fully funded in just 18 months.

As Moody’s treats underfunded pensions as a debt-like liability, a funding level of 100% would benefit leverage metrics, a credit positive.

“If discount rates far exceed current expectations and plans become overfunded, plan sponsors could become vulnerable to the risks of surplus cash sitting in pension trust funds,” added Smyth. “However, we believe companies have been managing this risk over the last several years by keeping voluntary contributions low.”

Read the report here (subscribers only).

 

Photo by Sarath Kuchi via Flickr CC License

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