2023 Prudent Pension Funding Report: A story of positive trends and persistent outliers

Executive summary:

• 97% of corporate defined benefit (DB) plans can achieve full funding without a significant draw on corporate cash. This is an increase from the 86% noted in last year’s report.
• Only 10 of the 500 pension plans belonging to companies in the Russell 1000® Index would need to contribute 20% or more of their cash flow from operations to achieve full funding in 10 years.
• A 50-basis-point improvement in asset performance can offset the need for additional contributions.

In the wake of last year’s market turbulence, are most corporate pension plans still on a pathway to achieving full funding?

Yes, according to our latest research. Our 2023 Prudent Pension Funding Report reveals most (97%) 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 2023. This finding increased from 86% in last year’s report.

Despite a challenging economic environment in 2023, pension plans continue on a positive trend for full funding. Whether it’s through a small increase in contributions or a small increase in returns, the report shows that full funding truly is attainable for most corporations in just a few years’ time.

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 cash flow percentage needed from operations for the pensions to become fully funded within 10 years.

This year’s report also revealed that 62% of companies’ pension plans would be fully funded in less than 10 years with a contribution rate of only 1% of corporate cash flow (holding all other factors constant), while an additional 35% of companies’ pension plans could be fully funded in less than 10 years at a 3-5% contribution rate. Only 10 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 2023 report, that number dropped to just 2%.

In addition, the report shows the percentage of companies in challenging or very challenging situations declined from 14% in 2022 to 4% in 2023. Meanwhile, the gap between pensions in healthy funding situations and those in challenging funding situations has narrowed considerably since last year’s report.

For companies in the healthy band on the report’s funded status health check scale (those that can achieve full funding with a contribution rate of 5% or less), an extra 5% in assets would cut their years-to-full-funding burden down from multiple years to just one. In this scenario, companies in the challenging band (those that can achieve full funding with a contribution rate from 5-10%) would also see drastic improvements for funding.

This year’s report demonstrates that for some companies, there are more avenues to reducing a funded status burden than just contributions. Ultimately, we believe that a prudent contribution rate and a prudent investment policy are key to achieving full funding, with limited impact on cashflows.