The funded status of the largest corporate pension plans in the U.S. remained unchanged from last year’s funding level after declining interest rates offset the gains made in the stock and bond markets.
Data from Willis Towers Watson show that the aggregate pension funded status was estimated to be 87% at the end of 2020, unchanged from the end of 2019.
The analysis also found the pension deficit is projected to be $233 billion at the end of 2020, slightly higher than the $230 billion deficit at the end of 2019. Pension obligations increased 5% to an estimated $1.83 trillion in 2020 from $1.75 trillion in 2019.
“While funded status rebounded from a disastrous 8-percentage-point drop in the first quarter, plan sponsors ended 2020 frustrated by the lack of progress in shoring up their plans,” said Jeff Brown, managing director, retirement at Willis Towers Watson, in a news release announcing the analysis. “Continued declines in interest rates have significantly increased liabilities, leaving plans’ funded status levels stuck in neutral for the past three years despite stellar investment performance and significant contributions.”
Pension plan assets increased to an estimated $1.6 trillion at the end of 2020 from $1.52 trillion at the end of 2019.
While overall investment returns are estimated to have averaged 12.9% in 2020, the returns varied significantly by asset class. For example, aggregate fixed income experienced 8% gains, while long-corporate and long-government bonds saw gains of 13% and 18%, respectively.
Meanwhile, domestic large-cap equities grew 18%, and domestic small- and midcap equities saw gains of 20%.
Willis Towers Watson examined pension plan data for 366 Fortune 1000 companies that sponsor U.S. defined benefit plans with a fiscal year ended Dec. 31.
Funding may have been flat for the year, but it could have been worse if not for fourth-quarter gains.
Wilshire Associates’ monthly report noted that the aggregate funding ratio for U.S. corporate plans increased by 1.7 percentage points to 86.8% as of Dec. 31 from Nov. 30 and by 3.9 percentage points from Sept. 30. The monthly change in funding resulted from a 1.5-percentage-point increase in asset values and a 0.3-percentage-point decrease in liability values.
“December’s funded ratio increase was driven by positive monthly returns for most asset classes … due to optimism around a return to normalcy with the rollout of the COVID-19 vaccine,” said Ned McGuire, managing director and a member of the investment management and research group of Wilshire Associates, in a news release announcing the results.
Legal & General Investment Management America’s Pension Fiscal Fitness Monitor estimated the funding ratio of a typical corporate pension plan improved to 82.1% as of Dec. 31 from 77.9% on Sept. 30.
Plan discount rates decreased by 17 basis points, as Treasury rates rose 20 basis points and credit spreads tightened 37 basis points over the quarter.
As measured by Barrow, Hanley, Mewhinney & Strauss, the average corporate pension plan funding ratio is estimated to have increased to 89.1% as of Dec. 31 from 84% as of Sept. 30.
The estimate was calculated using the most recent 10-K filings from Russell 3000 companies and estimating the funding ratios using the following asset allocation with asset classes’ associated indexes: 29% long-duration fixed income, 28% domestic equities, 15% international equities, 10% core fixed income, 6% hedge funds, 5% private equity, 3% each cash and commodities, and the remainder in real estate investment trusts.
By industry, Barrow Hanley said the average funding ratio as of Dec. 31 was highest among banks at 108.8% and lowest among airlines at 78.9%.
