Russell Investments has released its 2023 Prudent Pension Funding Report, which 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,” said Michael Hall, Managing Director, Americas Institutional at Russell Investments. “Whether it’s through a small increase in contributions or a small increase in returns, full funding truly is attainable for most corporations in just a few years’ time.”

Using historic data from the firm’s Enterprise Risk Report, Hall and his colleagues 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.

The 2023 Prudent Pension 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,” Hall said.

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%. Meanwhile, the gap between pensions in healthy funding situations and those in challenging funding situations 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.

Hall added that the year-over-year improvement can be attributed to the sharp rise in the Federal Reserve (the Fed) funds rate because when rates rise and assets fall less than liabilities, funded status improves. If the Fed significantly cuts rates in 2024, the prospect for a trend reversal could increase.

“We believe it’s prudent to consider increasing contributions in the short-term, while cashflows are up to ensure greater stability,” said Hall, who has been providing investment consulting services to institutions since 1998. “Our data also demonstrates that for some companies, there are more avenues to reducing a funded status burden than just contributions. A prudent contribution rate and a prudent investment policy are key to achieving full funding, with limited impact on cashflows.”

About Russell Investments

Russell Investments is a global investment solutions firm providing a wide range of services to institutional investors, financial intermediaries and individual investors. The firm has $291.9 billion in assets under management (as of September 30, 2023) for clients in 30 countries. Headquartered in Seattle, Washington, Russell Investments has 17 offices in major financial centers, including New York, London, Paris, Toronto, Tokyo and Shanghai. For more information, please visit www.russellinvestments.com.