How do you lose more than $400 billion and still end up better off than you were before?

Easy. You run a pension fund.

America’s top corporate pension funds have broken into surplus this year for the first time since 2007, just before the global financial crisis, despite disastrous 2022 investment losses on the stock and bond markets.

The reason? Even while markets plunged, rocketing inflation has also led to soaring long-term interest rates. And thanks to accounting rules, pension funds can use those higher interest rates — quite legitimately — to slash the bookkeeping value of their future pension obligations.

We’re talking huge numbers, too. The top 100 funds have seen the accounting value of their liabilities plunge by a third since the end of 2020 according to analyst group Milliman.

Savings: $685 billion.

That’s far more than pensions have lost on stocks and bonds over the same period. With rates still high this year, while stocks have rebounded, the top 100 funds ended July in the black with $1.04 in assets for every $1 in future liabilities, according to Milliman’s numbers. Insurance giant Aon puts the figure at $1.02.

Since late 2021, the average discount rate used by these funds to calculate the value of future obligations has nearly doubled, from 2.73% to 5.25%.

“Over the last 12 months (August 2022–July 2023), the cumulative asset return for these plans has been 1.6%, and yet the Milliman 100 PFI funded status deficit has improved by $43 billion,” Milliman reports. “This funded status gain is primarily the result of significant increases in discount rates over the past 12-month period. Discount rates increased by 100 bps to 5.25% from 4.25% one year ago.”

This leaves pensions on average in their best financial shape since just before the last two financial crashes, in 2007 and in the early 2000s. And it also leaves them vulnerable to any fall in interest rates.

In the private sector, defined-benefit plans such as these are holdovers from a bygone age. Such traditional pension plans pay retirees an income for life based upon their salary and years of service. The corporation which manages the fund bears the investment risk, whereas in modern defined-contribution plans — such as 401(k)s — the risks are borne by the employee. The top 100 corporate plans now hold $1.35 trillion in assets, according to Milliman.

Defined-contribution plans, by contrast, hold $9.8 trillion — or more than seven times as much.

Traditional “defined-benefit” plans remain the norm in state and local governments, where they hold an estimated $5.3 trillion in assets and have 27 million active and retired members. The investment risks in those cases are borne by the taxpayers. And many of those funds remain in financial trouble, with an average of 77 cents in assets for each $1 in obligations as of the end of last year.

Just so long as markets keep going up, and interest rates don’t go down, things shouldn’t get any worse.

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