Private pension funding drops to lowest level in 6 years

Companies take advantage of new rules to cut back on contributions

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Even as stock market rose last year, pension funding levels at America's biggest companies in 2014 fell to levels not seen since just after the financial crisis.

One big reason: Employers cut back on contributions to their plans to the lowest amount in six years, according to an analysis by benefits consultant Towers Watson, thanks, in part, to a break offered up by Congress last summer to bail out the Highway Trust Fund. (Tweet This)

As employers cut back on contributions, pension plans face higher costs meeting their financial promises to retirees. Last fall, new mortality tables showing retirees are expected to live longer raised pension plans' liabilities, forcing them to set aside more money to meet them.

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Pension plans also face the ongoing drag of lower interest rates, according to Alan Glickstein, a senior retirement consultant at Towers Watson

"We're seeing some pretty good investment returns over the past few years but there being more than offset by liabilities being driven up by lower rates," he said.

Low interest rates hurt pension funds two ways. First, they lower the returns on safe, fixed income investments like Treasury bonds. But they also drive up the current cost of providing a fixed monthly payment to retirees well into the future. That means companies have to set aside more money in their pension plans to cover the increased liability created by lower rates.

Read MoreFunding shortfalls put pensions in peril

But many companies argue that the current era of record low interest rates is an anomaly—and that rising rates will eventually make up for the shortfall created, in part, by the ultra-low rates engineered by the Federal Reserve to repair the damage to the financial system after the 2008 collapse.

"If you believe that interest rates will be higher not too many moons down the road here, and that to some extent they're being pushed down by government policies to stimulate the economy, you wouldn't view current rates as the most realistic funding target," said Glickstein.

That's one reason Congress last summer gave companies a break on their pension fund contributions, allowing them to "smooth" the way they account for the ups and downs of interest rates over a longer period. That allowed them to cut back on pension fund contributions by as much as $50 billion, according to one estimate by Moody's.

The deal was part of a political maneuver to bail out the nearly insolvent Highway Trust Fund, which is running on fumes because the gasoline tax hasn't been raised in 20 years. The idea was to let big companies cut pension funding to boost profits, which would raise more corporate taxes, which would pay for filling more potholes.

The measure was only a stopgap fix; unless Congress acts soon, the trust fund is expected to run out of money again this summer. In any case, say pension rights advocates, tinkering with pension accounting is the wrong way to fix potholes.

"Pension policy should not be determined for any other purpose than promote retirement security," said Nancy Hwa, a spokeswoman for the Pension Rights Center.

Read MorePensions or potholes? Congress chooses potholes

The accounting change—together with a separate revision in 2012—allowed companies to cut their contributions last year to the lowest level in six years, according to Towers Watson.

The result is a bigger shortfall between what pension plans owe current and future retirees and how much they have set aside to pay them. In 2007, the large funds surveyed by Towers Watson had a surplus of $82 billion; that swung to a record $297 billion shortfall by the end of 2012. A rising stock market helped shrink that deficit to $128 billion in 2013. But last year the shortfall nearly doubled—to $248 billion.

That left the average fund with enough assets to cover 82.2 percent of liabilities—down from 90.2 percent for 2013 but up from 77.1 percent for 2012.

Pensions with funding levels below 100 percent aren't necessarily at risk of running out of money, especially if they've closed access to new members and their overall liabilities are shrinking. But the drop in funding is a troubling sign for workers depending on a monthly check in retirement, said Hwa.

"Companies should be keeping up with their contributions to their pension funds," said Hwa. "We are worried that companies are going to continue to shed their obligations by making lump sum offers and insurance annuities—or terminate their plans altogether."