By Jane Meacham, Contributing Editor

Strong market returns and larger-than-expected employer contributions shored up the funded status of the United States’ largest corporate pension plans modestly at the end of 2017, compared with the end of 2016, according to an analysis released January 2 by consulting firm Willis Towers Watson.

Results indicate that the aggregate pension funded status was estimated to be 83% at the end of 2017, compared with 81% at the end of the previous year. That level of funding is the highest for these plans since 2013, according to Willis Towers Watson.

The study also found that the total pension deficit for the 389 Fortune 1000 companies’ defined benefit (DB) plans reviewed is projected to have decreased to $292 billion at the end of 2017, narrowing from a $317 billion deficit at the end of 2016.

Total pension obligations moved from $1.65 trillion to an estimated $1.72 trillion in the latest year, with the biggest changes being the increase for lower discount rates largely offsetting the decrease for benefits paid. According to the consulting firm’s analysis, DB plan assets increased in 2017, from $1.33 trillion at the end of 2016 to an estimated $1.43 trillion at the end of 2017.

The analysis examined pension plan data for the 389 Fortune 1000 companies’ plans that have a December fiscal-year-end date.

Reasons for Large Contributions

The plan sponsors poured $51 billion into their plans in 2017, nearly double the amount needed to cover the pensions accruing during the year. These contributions were higher than the $43 billion employers contributed to their plans’ funding in 2016.

Willis Towers Watson retirement consultants said the rush of contributions was most likely in response to rising Pension Benefit Guaranty Corporation (PBGC) premiums for DB plans, rising interest in “derisking” strategies to remove pension obligations from corporate balance sheets, and potentially in anticipation of lower future corporate rates as a result of recent U.S. tax reform.

DB plans have struggled in recent years to maintain required funding levels amid low interest rates. Many companies in recent years have had to inject reserves into their plans to keep from falling into “underfunded” status, which traditionally has been regarded as a funding ratio below 80%. Plans with assets below that level may have trouble meeting obligations to retirees and other beneficiaries or face benefit restrictions established by the Pension Protection Act (PPA) of 2006.

Overall investment returns are estimated to have averaged 13% in 2017, although returns varied significantly by asset class. Domestic large-capitalization equities returned 22%, while domestic small- to mid-capitalization equities earned 17%. Aggregate bonds provided a 4% return; long corporate and long government bonds, typically used in liability-driven investing (LDI) strategies, earned 12% and 9%, respectively, Willis Towers Watson said.

The 2017 pension plan figures provided by Willis Towers Watson are estimates of U.S. plan assets and liabilities. The earlier-year figures are actual.

“The uptick in funded status is welcome news for many plan sponsors,” said Beth Ashmore, senior consultant at Willis Towers Watson. “As we look to 2018, we anticipate employers will begin to digest the new tax bill and what it may mean for their benefit plan financing. Employers should consider their broader pension management strategy as they make that evaluation, which may include reviewing their investment strategy or implementation of pension de-risking strategies, such as an annuity purchase.”  

Find Out More

For more information about funding balances, adjusted funding target attainment percentage and benefit restrictions for underfunded retirement plans, see the Pension Plan Fix-It Handbook. (Fig. 132-A explains rules that determine if a plan is underfunded.)