Rising interest rates and a soaring stock market have boosted the funded status of corporate pension plans to the highest point they have been since 2007.
“That was the last year when plan liabilities were decreasing — by about 3 percent [for Fortune 1000 companies with pension plans], and plan assets were increasing — 5.9 percent on average,” said Kimberly Stockton, Vanguard Investment Strategy Group.
This year is shaping up to be even better. At the end of September, the S&P 500 returned 19.79 percent for the year and interest rates were continuing their climb that began in September 2012, she said.
Plan sponsors are required to use the interest rates on high-quality bonds to measure their plan liabilities. When interest rates go down, plan liabilities go up.
Interest rates hit their all-time low in August 2012 and plan liabilities also reached an all-time low funded status. Rates have steadily improved since then and the unfunded ratio of plans has decreased.
According to Vanguard’s “Survey of defined benefit pension plans, 2012,” the majority of plan sponsors are concerned about managing the volatility of their pension portfolios.
Nathan Zahm of Vanguard Investment Strategy Group said that because of improving market conditions, he believes that many plan sponsors will resurrect plans that were put on hold. Others may take this opportunity to terminate their plans.
“When interest rates were so low and funded status so poor, they couldn’t do so without making large and costly contributions. Now, that cost has likely decreased significantly,” he said.
Plan sponsors considering a lump-sum payout to terminated, vested participants will probably make that happen early next year, he said.
Lump sums are calculated using interest rates, so lower rates mean higher lump sums. So right now, with interest rates going up, the cost of lump sums has gone down.