For many investors, last year's stock market gains helped make up for the heavy losses inflicted by the 2008 financial collapse. But it turned out to be a lousy year for private pension funds, which lost ground on their funding levels.
After gradual progress rebuilding the funds they need to pay retirees, the average private pension fund held about 80 percent of what it needs to cover those payments, according to a report by benefits consultant Towers Watson. That's down from 89 percent at the end of 2013 and represents an overall deficit among large corporate plans of about $343 billion, nearly double the shortfall a year earlier.
Much of the shortfall came from an increase in liabilities (or the amount they now expect to owe beneficiaries). Even as companies have pared back their defined-benefit plans—the ones that pay a guaranteed check for life—the cost of keeping that promise has increased. There are two big reasons: lower interest rates and longer life expectancies.
Low interest rates reduce the amount of money a pension fund can earn from money already set aside, raising the level it needs to generate enough cash. Interest rates also affect the way pension accountants estimate the future cost of writing all those retirement checks. Accountants look at something called the "time value of money" to compare how a given amount of money today will be worth decades in the future.
The other hit to pension funding levels came from the latest data showing that retirees are living longer than the long-term assumptions that were used to calculate how much their defined benefits will cost. Last fall, new mortality tables from the Society of Actuaries showed that between 2000 and 2014, longevity for the average male age 65 rose by two years to 86.6. For women age 65, overall longevity during the same period rose 2.4 years to age 88.8.
The SOA estimated that those gains in lifespan could add as much as 4 percent to 8 percent to a private pension plan's liability.
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