Corporate Pension Funding Weakened in 2014

The financial health of private pension plans weakened in 2014, with funded ratios falling to levels resembling post-recession lows.

A year-end analysis from Towers Watson finds the aggregate pension funded status for Fortune 1000 companies fell to about 80% at the end of 2014, down 9% from a year earlier to give back much of the gains from 2013.

This represents a significant setback for pensions at the nation’s largest corporate employers, with a weakened funded status developing despite a year of relatively solid market gains. Towers Watson points to falling interest rates and the impact of new mortality tables as primary drivers of a lower pension funded status for 2014—two themes discussed often by the retirement planning industry during the year. The good news of added longevity aside, sponsors of large defined benefit (DB) plans have had to adopt revised longevity numbers from the Society of Actuaries (SOA), which caused substantially increased liabilities and lowered funded status for the typical U.S. pension plan.

“For most plan sponsors, the discussion around the Society of Actuaries’ new study on the mortality of pension plan participants was the most significant pension event of the year,” notes Dave Suchsland, a senior retirement consultant at Towers Watson. “The study drew the attention of plan sponsors and auditors, resulting in many plan sponsors updating that key assumption.”

The Towers Watson analysis examined pension plan data for the 411 Fortune 1000 companies that sponsor U.S. tax-qualified pension plans and have a December fiscal-year-end date. Results indicate that the aggregate pension funded status is estimated to be 80% at the end of 2014, a decline from 89% at the end of 2013. Researchers also found that the pension deficit increased to $343 billion at the end of 2014, more than twice the deficit at the end of 2013.

“Despite a rising stock market in 2014, funding levels for employer-sponsored pension plans dropped back to what we experienced just after the financial crisis,” notes Alan Glickstein, a senior retirement consultant at Towers Watson. “A one-time strengthening of mortality assumptions alone is responsible for about 40% of the increased deficit.”

Glickstein says the analysis also found that plan sponsors that used liability-driven investing (LDI) strategies in 2014 had better results, as the declining discount rates were matched with very strong returns for long corporate and Treasury bonds. Overall, pension plan assets in the sample group increased by an estimated 3% in 2014, reflecting an underlying investment return of about 9%.

The analysis suggests investment returns varied significantly by asset class. Large-cap U.S. equities were up roughly 14%, while international equities declined by nearly 5%. The Towers Watson analysis estimates that companies contributed $30 billion to their pension plans in 2014—29% less than in 2013 and the lowest level of contributions since 2008. Contributions have declined steadily in recent years, Towers Watson says, partly due to legislated funding relief provided under the Moving Ahead for Progress in the 21st Century Act (MAP-21).

“We experienced another big year of pension de-risking in 2014, with significant lump-sum buyout and annuity purchase activity,” Suchsland says. “Given the change in funded status, we expect many plan sponsors will need to re-evaluate their retirement plan strategies in 2015. This year will most likely bring higher expense charges and, unless there is an uptick in interest rates or equity market performance, eventually additional contribution requirements.”

The full year-end 2014 results will not be publicly available until the spring, Towers Watson says.