Pensions have a $296.1B problem, You’d think the soaring stock market last year would have put pensions on stronger ground. You’d be wrong.
Pension plans ended 2014 only 82.5% funded, down from their 89.7% funding level in 2013, according to a report issued by Wilshire Consulting last week. That means defined benefit plans only hold 82.5 cents in assets for every dollar in liabilities they face in to satisfy pensioners’ claims.
The shortfall widened even after the stock market jumped nearly 12% last year.
It gets worse. At the end of last year, 90% of corporate pension plans were underfunded, a dramatic worsening from 2013 when just 80% were underfunded.
Don’t blame the stock market. Thanks in part of a strong stock market, the value of pension assets held by companies in the Standard & Poor’s 500 rose by $62 billion, or 4.6%, to $1.4 trillion.The problem lies with liabilities, or the amount that pensions are on the hook for. The liabilities rose even faster. Total liabilities increased $204.7 billion, or 14%, to $1.7 trillion. There was a $153 billion shortfall at the start of the year, which ballooned into $296.1 billion by the end of the year.
Much of the increase in the liabilities was due to changes in the way companies estimate the present value of their future obligations. We’re talking about calculations accountants think about – but pensioners should care about. Companies used a lower discount rate, which increases the current value of these liabilities down the road. Additionally, mortality tables changed and drove the liabilities higher, Wilshire says.
Looks like companies might need to ramp up what they’re putting into their pensions. Last year, S&P 500 reported pension expense of $43.5 billion, Wilshire says, up from $35 billion in the previous year.
The shortfall widened even after the stock market jumped nearly 12% last year.
It gets worse. At the end of last year, 90% of corporate pension plans were underfunded, a dramatic worsening from 2013 when just 80% were underfunded.
Don’t blame the stock market. Thanks in part of a strong stock market, the value of pension assets held by companies in the Standard & Poor’s 500 rose by $62 billion, or 4.6%, to $1.4 trillion.The problem lies with liabilities, or the amount that pensions are on the hook for. The liabilities rose even faster. Total liabilities increased $204.7 billion, or 14%, to $1.7 trillion. There was a $153 billion shortfall at the start of the year, which ballooned into $296.1 billion by the end of the year.
Much of the increase in the liabilities was due to changes in the way companies estimate the present value of their future obligations. We’re talking about calculations accountants think about – but pensioners should care about. Companies used a lower discount rate, which increases the current value of these liabilities down the road. Additionally, mortality tables changed and drove the liabilities higher, Wilshire says.
Looks like companies might need to ramp up what they’re putting into their pensions. Last year, S&P 500 reported pension expense of $43.5 billion, Wilshire says, up from $35 billion in the previous year.
