The Markets July 2, 2013

Funded Status of Corporate Pensions Rose in June

The funded status of U.S. corporate pensions rose by 3.1 percentage points in June to 89.5%, according to the BNY Mellon Investment Strategy & Solutions Group (ISSG).
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This was the highest level since June 2011, when it was 91.4%, and year-to-date, the funded ratio is up 13.2 percentage points, BNY Mellon said.

The improvement was driven for the second month in a row by a jump in the Aa corporate discount rate, which drove liabilities sharply lower, according to the “BNY Mellon Pension Summary Report for June 2013.” Liabilities for the typical corporate plan fell 5% as the discount rate on the Aa corporate bonds increased 39 basis points to 4.69%. Plan liabilities are calculated using the yields of long-term investment grade bonds. Higher yields on these bonds result in lower liabilities.

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The report also found that assets for the typical corporate plan fell 1.6% as U.S. equity markets had their first losing month in 2013.

“Investors are growing more confident that the U.S. Federal Reserve is getting ready to taper its easing policies, and this is resulting in higher interest rates, which benefits plans,” said Jeffrey B. Saef, managing director, BNY Mellon Investment Management, and head of the ISSG. “While assets fell slightly in June, the big decline in liabilities more than compensated for the fall in equity values, leading to the improvement in funded status.”

Saef added that many pension plans view a funded status of 90% as a threshold for shifting a portion of their equities into liability-matching assets. “With the funded status at over 89% and yields rising, we would not be surprised to see a growing number of companies moving assets into longer term corporate bonds.”

Data & Research July 2, 2013

DC Plan Participation at Record High

A new report from Aon Hewitt says participation in defined contribution (DC) plans is at an all-time high.
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The “2013 Universe Benchmarks Report” found participation rates in DC plans have reached their highest levels since Aon Hewitt began tracking such data in 2002. On average, 78% of employees participated in a DC plan in 2012, compared with 75% in 2011 and 68% in 2002.

The report also showed that as the markets have rebounded, average DC plan balances have reached their highest levels since 2006. The average total plan balance in 2012 was $81,240, up significantly from $57,150 in 2008.

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However, Aon Hewitt’s analysis showed employee savings rates remain flat, suggesting more work is needed to continue to help employees achieve retirement security.

“It is encouraging to see more people participating in DC plans–the impact of automatic enrollment has been astounding,” said Patti Balthazor Bjork, director of Retirement Research at Aon Hewitt. “Companies are definitely moving in the right direction when it comes to encouraging financial wellness among their workers, but there is certainly opportunity to do more.”

According to Aon Hewitt, the rise in participation rates is largely driven by an increase in the number of employers that automatically enroll employees in their DC plans. Today, 59% of employers automatically enroll employees in their company's DC plan, compared with 34% in 2007. On average, participants subject to automatic enrollment had a participation rate of 81%, nearly 20 percentage points higher than those without automatic enrollment.

In addition, the report showed employees continue to save at rates insufficient to support adequate long-term savings goals. The average pre-tax contribution rate remained flat from 2011 at 7.3% of pay. Most concerning, said Aon Hewitt, is that employees are not saving enough to take advantage of employer matching contributions. Nearly 28% of employees contributed below the employer match threshold, potentially sacrificing tens of thousands of dollars in retirement savings over the course of a person's career.

"Once they are enrolled in the plan, inertia takes over for many employees and they make few adjustments to their DC plans," said Bjork. "Employers can help by coupling automatic enrollment with other features, like contribution escalation, that enable employees to increase their savings rate over time. Combined, these can make a big impact on employees' long-term financial outlook."

Aon Hewitt's analysis covered more than 140 defined contribution plans, representing 3.5 million eligible employees. Report highlights can be found here.

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