The new year has arrived, but it remains to be seen if Santa Bernanke will bring a rise in interest rates to corporate pension plan sponsors hoping for a funding gift. Whether 2013 will be the year that the Federal Reserve finally lets rates rise is a burning question for plan sponsors; if and when this does occur, it may represent a bottom for pension funding levels, which fell to 75 percent in 2012 from 106 percent of pension obligations in 2007, according to Towers Watson.
Pension funding performance in this current recovery is decidedly subpar. Unlike the last recession of 2001–2002, when funding levels began to rise in 2003 and continued to rise through 2007, after the financial crisis of 2008, pension funding crashed to 77 percent, then rose in 2009 and 2010, hitting 84 percent. Funding levels then resumed their decline in 2011 and 2012 and are now below their levels at the height of the financial crisis.
A number of factors affected funding levels in 2012: contributions, investment gains and new benefit accruals. But the biggest factor of all was a decline of 55 basis points in the average yield on indexes of long-dated, high-grade corporate bonds used by actuaries to discount future obligations in pension plans, according to Mike Archer, senior consultant at Towers Watson in Parsippany, N.J. “That decline in interest rates increased the obligations for [corporate] pension plans by about $175 billion,” says Archer. “That was far and away the major driver behind the decline in the funding level.” Absent lower interest rates, funding levels would have risen and deficits would have fallen, according to Archer.....