Monday, May 4, 2015

Our Longevity and the Impact on America's Pension Plan Funding Levels

Even though the stock market has done this over the past two years:

...and bond prices have risen over the same two year period, according to the annual corporate pension plan funding levels report by Towers Watson, the aggregate funding status (i.e. the overall funding status) of the pension plans managed by the 411 largest Fortune 1000 companies dropped significantly over 2014.

Here is a bar graph that shows the funding level for each year since 2000:

As I noted above, despite the banner year in both the stock and bond markets in 2014, employer-sponsored pension plans saw their funding level drop to just aloe the level seen in 2008 when the world's economy was near collapse.

Over the year, pension plan assets increased by 3 percent, from $1.36 trillion in 2013 to $1.4 trillion in 2014, largely on an average investment return of 9 percent for all classes of assets.  The returns varied considerably among classes with a 14 percent positive return on large-cap United States equities and a 5 percent negative return on international equities.  On top of the returns on assets, companies contributed an additional $30 billion to their pension plans during 2014, the lowest level of contributions since 2008.

Given the reasonable return on investments, why did the funding level of employer-sponsored pension plans drop by 9 percentage points over 2014?  It is largely a result of an actuarial readjustment.  The Society of Actuaries (SOA) periodically reviews the mortality rates of retirees to determine the impact of our lifespan on the funding requirements of pension plans.  In the most recent mortality study, the SOA looked at 123 private and public/federal pension plans over the years from 2004 to 2008 which reflected approximately 10.5 million life years of exposure and more than 220,000 deaths.  From this data, the SOA found the following:

1.) Males: among males aged 65, overall longevity rose 2.0 years from age 84.6 in 2000 to age 86.6 in 2014.

2.) Females: among females aged 65, overall longevity rose 2.4 years from age 86.4 in 2000 to age 88.8 in 2014.

Based on this data, the SOA estimates that there is a four to eight percent increase in private pension plan liabilities, depending on the individual pension plan.  In other words, because we are living longer, pension plans are required to pay pension benefits for a longer period of time (i.e. we are a liability for a longer period of time), meaning that companies must increase their returns on investment or increase the level of their contributions or some combination of the two.

This will have an ongoing impact as baby boomers continue to retire.  Over the coming decade and a half as the last of the baby boomers reaches the age of 65, if longevity continues to increase at the same time as the number of retirees mushrooms, pension plan managers could find themselves under significant pressure to maintain reasonable funding levels.  Excluding the impact of either a significant and long-duration bond or stock market correction, it is becoming clear that pension plans could well be the biggest Ponzi scheme of the last century. 


  1. I fully agree that the numbers do not work and the problem is getting larger. The 25 biggest systems by assets averaged a 7.45 percent return from 2004 to 2013 Moody’s said in a report released recently. The bad news from the New York-based credit rater is that pension liabilities have tripled in the eight years through 2012.

    Pensions and promises will be broken so get ready for more pain. This should not come as news or a shock because the subject tends to surface every now and then in the news. More on this growing problem in the article below.

  2. I don't think the change in assets going from 2013 to 2014 will bear the weight of this longevity interpretation. My own portfolio, concentrated in growth stocks, went from +36% in 2013 to +7% change in 2014. So 2013 was just a very good year.