Executive summary:
- 92% of corporate defined benefit (DB) plans can achieve full funding without a significant draw on corporate cash. This slight decline from the 97% noted in last year’s report can largely be attributed to the high interest-rate environment and changes in some companies’ financial situations.
- Only roughly 20 of the 500 pension plans belonging to companies in the Russell 1000® Index would need to contribute 20% or more of their cashflow from operations to achieve full funding in 10 years.
- A handful of companies that were perched on the knife’s edge in last year’s report—the distance between a possible and impossible road to full funding—fell over to the wrong side in this year’s report, with their full-funding horizons ballooning from 8-13 years to 110 years.
Are most corporate pension plans still on a path to full funding?
Yes, according to our latest research. Using historic data from our firm’s Enterprise Risk Report, we studied approximately 500 pension plans for companies in the U.S. large-cap Russell 1000® Index with pension disclosures to determine the cashflow percentage needed from operations for the pensions to become fully funded within 10 years. Our findings reveal that most (92%) corporate pension plans can achieve full funding without a significant draw on corporate cash, based on the respective firms’ latest disclosures as well as market and interest rate movement so far in 2024. However, this does represent a slight decline from 2023, when the percentage stood at 97%.
This slight deterioration in funded status was primarily due to two factors. The first was that equity-market performance in 2023, while still strong, was not robust enough to fully offset the headwinds of high interest rates. The second factor was that some companies’ financial situations changed, impacting cashflow available for contributions.
The data from our report also shows there are still a handful of companies with plans in precarious funding situations. Depending on what steps are taken and when, these plans may or may not ever be able to attain full funding. This group of outliers is living on the so-called knife’s edge, where small market movements or interest rate changes could permanently jeopardize their funded status goals. On the flip side, the right asset allocation combined with a prudent funding policy could put them squarely on the path to full funding. Critically, this year’s data shows that the knife’s edge—the distance between a possible and impossible road to full funding—persists and was felt by more plans this year than last.
This year’s report also revealed that 65% of companies’ pension plans would be fully funded in less than 10 years with a contribution rate of only 1% of corporate cashflow (holding all other factors constant). This is a slight increase from the 62% seen in the 2023 report. Additionally, 27% of companies’ pension plans could be fully funded in less than 10 years at a 2%-5% contribution rate.
Only 20 pension plans of the 500 reviewed would need to contribute 20% or more of their cash flow from operations to achieve full funding in 10 years. This small minority of plans have historically driven the narrative, creating the continued false perception that the majority of corporate pension plans are in crisis.
The Prudent Pension Funding Report looks at the past decade for perspective. In 2012, at a 5% contribution rate, 78% of plans required more than 10 years to achieve full funding. In the 2024 report, that number dropped to just 8%.
However, it’s important to note that this significant decline in funding burdens occurred during a period of time when markets were predominately in a bull market. This begs the question: What happens when the next bear market strikes? Since even the smallest changes in markets can have outsized, detrimental impacts on a plan’s health, we believe plan sponsors that could achieve full funding with just a small increase in contribution rates from operational cashflow should consider doing so to eliminate the problem entirely.
Ultimately, we see a prudent contribution rate and a prudent investment policy as key to achieving full funding, with limited impact on cashflows. Please let us know if we can be of assistance.