The pension funded status of the nation’s largest corporate plan sponsors finished the year unchanged compared with the end of 2014, due in large part to a rise in interest rates mostly offset by a weak global stock market, according to a new analysis by Towers Watson.
Towers Watson examined pension plan data for the 413 Fortune 1000 companies that sponsor U.S. tax-qualified defined benefit pension plans and have a December fiscal-year-end date, and estimates the aggregate pension funded status to be 82% at the end of 2015, which is the same as it was at the end of 2014. The analysis also found that the pension deficit narrowed modestly by $28 billion to $291 billion at the end of 2015, compared to a $319 billion deficit at the end of 2014.
According to the analysis, pension plan assets fell by an estimated 6% in 2015, from $1.41 trillion at the end of 2014 to an estimated $1.33 trillion at the end of last year. This reflects increases of roughly 2% due to investment returns and employer contributions offset by a decline of 8% from benefit payments and settlement transactions.
The analysis found that investment returns varied significantly by asset class. Domestic large-capitalization equities increased by 1%, while domestic small-/mid-capitalization equities declined by 3%. Aggregate bonds increased by less than 1%, and long credit bonds, typically used in liability-driven investing strategies, fell by 5%. With asset returns that were insufficient to keep up with the roughly 4% interest accruing on the obligations, the balance was made up by the decline in the obligation produced by the rising interest rates.NEXT: Pension plan sponsor contributions and rising interest rates
Towers Watson estimates that companies contributed $32 billion to their pension plans in 2015. These contributions were sufficient to cover new benefits earned by employees in 2015 but did not include a meaningful level of additional contributions to reduce the overall funded status deficit. Employer contributions have been declining steadily for the last several years partly due to legislated funding relief, the company said.
Despite the lack of improvement in overall pension funded status, employers continued to de-risk their pension plans with lump sum buyouts and group annuity purchases. “In fact, 2015 turned out to be the second-most-active recent year for annuity purchases, and we expect employers will continue to evaluate their retirement plan strategies this year,” says Matt Herrmann, a senior retirement consultant at Towers Watson.“It’s been nearly a decade since employers as a group have been able to fully fund their pension plans. If the Fed’s decision to raise short-term interest rates last month is the first move in a pattern of rising rates, generally we could see improved pension funded status in the coming year, depending of course on how the stock market responds,” concludes Alan Glickstein, a senior retirement consultant at Towers Watson.