The funded status of the 100 largest pension plan sponsors among U.S. publicly traded companies fell for the second straight year in 2012, despite strong investment returns and large employer contributions, according to an analysis by Towers Watson.
“Buoyed by the stock market and large contributions, employers have rebuilt their pension plan assets to a point before the 2008 market collapse,” says Alan Glickstein, a senior consultant at the firm. “However, that has been more than offset by growth in liabilities. Four consecutive years of declining interest rates have helped push liabilities 40% higher and left companies with even larger deficits than before.”
The pension deficit for the 100 pensions analyzed jumped 17% to US$295.2 billion at the end of last year, an increase of $42.5 billion. In 2007, these firms had a pension surplus of $86 billion. Also, in 2007, more than 51% of the largest 100 U.S. sponsors had fully funded pension plans. In 2012, only five companies in this group were fully funded.
According to the analysis, employers contributed $45.1 billion to their pension plans in 2012. That’s an increase from $38.9 billion in 2011 and the largest contribution employers have made in the past five years. The analysis noted that the companies contributed more than twice the amount of benefits accrued last year to keep funding levels up.
Over the last few years, many plan sponsors have been gradually adjusting their portfolios to reduce investment risk relative to liabilities, shifting from public equities to fixed income and alternative investments. Since 2009, average allocations to equities have fallen 10 percentage points, while allocations to fixed income investments have risen by eight percentage points. However, the shift away from equities slowed in 2012.
Pension plans are off to a good start in 2013. A strong equity market in the first quarter and roughly a 20-basis-point increase in interest rates have reversed the downward trend of the last few years.
If interest rates don’t continue their rise and equity returns weaken, Towers Watson says plan sponsors may need to pour more cash into their plans to improve funded status for the full year.