2022 Prudent Pension Funding Report

Just how hard would it be for most companies to solve their pension funding challenges? Easier than you might think, according to the data.

Our 2022 Prudent Pension Funding Report reveals that even in a volatile market environment, most (86%) corporate pension plans can achieve full funding without a significant draw on corporate free cash flow—based on 2021 disclosures and market and interest rate movement so far in 2022.

Majority could achieve full funding in just three years with no change to current allocations

The report shows that for companies looking to achieve full funding, the most straightforward solution could simply be a prudent contribution rate in concert with a prudent investment policy. Even with this year's volatile market, 50% of corporate pension plans could prudently achieve full funding in just three years contributing 1% of cash flow from operations, and 50% could achieve full funding in just one year with a more aggressive 5% of cash flow from operations.

Using historic data from our Enterprise Risk Report, we studied approximately 500 pension plans of companies in the U.S. large-cap Russell 1000® Index with pension disclosures. We looked at the percentage of cashflow from operations needed for these pensions to become fully funded within 10 years. The impact of poor performance of stock and bond investments in 2022, which diminished last year's funded status gains early in the year, tampered the liability-reduction good news of 2021 and created future uncertainty. Fast forward to the fourth quarter of 2022, however, and many plans are little changed from the beginning of the year's funded status, mostly thanks to not being fully hedged against interest rate risk in a rising rate environment.

The Prudent Pension Funding Report looks at the past decade for perspective. In 2012, only 22% of plans would have been able to achieve full funding within 10 years at a contribution rate of 5% cashflow from operations.1 This year, that number is up to 86%.

However, our report’s analysis of the sensitivity of time-to-full-funding metric indicates that the ability for pension plans to achieve full funding shifts from healthy to challenging to very challenging within a dangerously tight range of prevailing funded status. Just a few good or bad decisions could move firms in the challenging category into the healthy—or very challenging—categories.

Of the 500 plans we reviewed for this report, the average dollar amount of unfunded liabilities was about $530 million in 2020. The most recent 10k disclosures, issued in 2021, show that this figure has dropped to about $175 million, a difference of about $355 million in unfunded liabilities. As a result, the 500 companies in the Russell 1000 Index that have pension disclosures experienced a combined drop of $177.5 billion in unfunded liabilities.

1 Cashflow from operations is defined as the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term capital investment.