Biggest U.S. corporate pension plans stung by improving longevity in 2014

Widespread adoption of new mortality tables added $29 billion to combined liabilities for $20 billion club members in 2014, turning an already tough year into a significant setback, according to new Russell Investments’ research

SEATTLE, March 2, 2015

The double blow of an unexpected decline in interest rates and the introduction of new assumptions about how long retirees are expected to live, yielded an increase in the combined pension deficit of the “$20 billion club,” a group of 19 publicly listed U.S. corporations with pension liabilities in excess of $20 billion, according to recent analysis conducted by Russell Investments. As a result of widespread re-basing of liability values to reflect updated expectations about life expectancy, the $20 billion club – which represents nearly 40 percent of all pension and liability assets of U.S. listed corporations – saw its pension deficit rise from $114 billion in 2013 (the best position since 2007) to $183 billion at the end of 2014. Although the deficit remains less than the club’s all-time high of $220 billion in 2012, collective liabilities reached a new all-time peak in 2014, jumping from $842 billion in 2013 to $937 billion last year.

"One consequence of adopting new mortality assumptions in a year in which interest rates fell has been that the combined pension liabilities ended 2014 bigger than they ever had been before, exceeding the previous high of 2012 by some $23 billion,” said Bob Collie, chief research strategist for Americas Institutional. “This had seemed so unlikely to happen that we had started to refer to that previous high as ‘peak pension.’ But, against the odds, pension liabilities have re-peaked."

As the analysis shows, almost all of the club’s 19 corporations adopted the new mortality assumptions (in most cases the newly published RP-2014 table) for their 2014 financial statements. Even though the improvement in life expectancy occurred over a period of many years, it has been captured in corporate balance sheets as a one-off event in 2014.

“The total impact for the corporations who adopted the new assumptions in 2014 was roughly $29 billion, which equates to an increase in liabilities of more than three percent,” said Collie. “That’s been the big story out of this round of annual reporting. With the new mortality assumptions now in place, we expect that the next few months will see the focus shift back onto the other big trends affecting these plans: funded status; risk transfer; PBGC issues and so on.”

*Corporate pension disclosures based on the corporations’ financial years rather than calendar years.

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