Corporate pension funds are close to being fully funded after 2013’s strong move in the stock market and a big increase in yields on high-grade corporate debt.
“We’ve had everything working in our favor,” said Alan Glickstein, a senior retirement consultant at Towers Watson. “Assets went up, liabilities went down and funded status improved sharply.”
The increase in pensions’ funding status should allow firms to cut pension expenses in 2014, adding billions to corporate profits.
A report from Mercer Investment Consulting said the funding ratio for pensions of S&P 1500 companies rose to 95 percent by Dec. 31, 2013 from 74 percent at the end of 2012.
(Read more: Company pensions in peril as shortfalls hit record)
A similar analysis by Towers Watson found the funding ratio for Fortune 1000 companies rose to 93 percent in 2103 from 77 percent in 2012. Both levels are the highest they’ve been since 2007, though they remain below pre-recession levels of over 100 percent.
Funding ratios were helped by two key elements, the first being the 29 percent increase in the S&P 500 index in 2013. This helped to boost the value of the funds’ underlying assets, as roughly 30 percent of corporate pensions are held in equities.
The second element was an 80 basis point, or eight-tenths of a percentage point increase in high-grade corporate debt yields during the year.
The higher yields help to cut liabilities, or the present value of a future payment. Under pension accounting, as yields on these high-grade debt instruments increase, liabilities decline and overall funding ratios increase.
Glickstein estimates the higher funding ratios should improve the balance sheets of Fortune 1000 companies to the tune of $285 billion.
“That improved balance sheet also has an impact on the charge against profits these companies will calculate for 2014,” said Glickstein. “So it will improve their earnings picture by lowering their cost of pensions.”
Not all companies will be affected equally.
Those benefitting the most are the ones with big pension plans like telecommunications firms and older industrial companies, said Jonathan Adler a senior consultant for Mercer.
With pensions approaching fully funded levels, Adler expects a number of companies to “de-risk” or move the funds assets fully into bonds or annuities, reducing their exposure to the stock market.
(Read more: These CEO pension values will make your head spin)
Adler does not expect this to have a big impact on demand for stocks.
“It’s hard to find a correlation between stock markets going down and de-risking,” he said.
What Adler said de-risking could do for the companies is make them more attractive to investors who value a more stable earnings stream.
If a company fully funds its pension, it reduces or eliminates the possibility of lumpy pension expenses that can impact earnings as the markets fluctuate.
—By CNBC’s MaryThompson. Follow him on Twitter @MThompsonCNBC.