The largest corporate pension plans in the United States experienced a slight drop in their funded status at the end of 2018 due to the sharp decline in equities, according to an analysis by Willis Towers Watson.
The study, which looked at the defined benefit pension plans of 389 Fortune 1000 companies, found their pension assets declined in 2018 to about US$1.33 trillion from US$1.48 trillion at the end of 2017.
Read: Four investment themes for a turbulent 2019
While the aggregate pension funded status stood at 90 per cent in the first nine months of 2018, it dropped to 84 per cent by year end. At the end of 2017, the aggregate pension fund status was 85 per cent.
“Pension plans had been on track for another year of improved funding through the third quarter of 2018 as a result of higher interest rates, relatively stable equity markets and solid contributions,” said Jennifer DeMeo, senior director at Willis Towers Watson, in a news release. “However, the steep decline in the equities market during the fourth quarter, particularly in December, negated what had been a very positive year.”
Read: 2018 Top 40 Money Managers Report: The Trump effect
While investment returns varied among asset classes, the majority produced negative returns with an average of negative 4.7 per cent in 2018, according to Willis Towers Watson. U.S. small to mid-cap equities saw the poorest performance with a return of negative 10 per cent, while U.S. large-cap equities lost four per cent. Liability-driven investment tools such as long-term corporate and government bonds also experienced negative returns, with losses of seven per cent and two per cent, respectively.
“The volatility in the fourth quarter, and especially in December, which was one of the worst months since the great recession, demonstrates how quickly conditions change,” said Royce Kosoff, managing director at Willis Towers Watson. “We expect sponsors will continue to express interest in risk management strategies, such as revisiting their investment approach or transferring obligations via an annuity purchase or through lump-sum buyouts.”
The plan sponsors in the study contributed an estimated US$47 billion to their pension plans in 2018.