Pension deficit increased as funded status dropped nine
percentage points
ARLINGTON, VA, January 5, 2015 — The pension funded
status of the nation’s largest corporate sponsors reversed direction in 2014,
dropping nine percentage points as falling interest rates (which increased
liabilities) and the impact of new mortality tables were only partially offset
by strong returns on pension plan assets, according to a new analysis by global
professional services company Towers Watson (NYSE, NASDAQ: TW).
The Towers Watson analysis examined pension plan data for
the 411 Fortune 1000 companies that sponsor U.S. tax-qualified defined benefit
pension plans and have a December fiscal-year-end date. Results indicate that
the aggregate pension funded status is estimated to be 80% at the end of 2014,
a decline from 89% at the end of 2013. The analysis also found that the pension
deficit increased to $343 billion at the end of 2014, more than twice the
deficit at the end of 2013, as overall pension plan funding weakened by $181
billion last year.
Fortune 1000
aggregate pension plan funding levels
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*Estimated
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“Despite a rising stock market in 2014, funding levels
for employer-sponsored pension plans dropped back to what we experienced just
after the financial crisis,” said Alan Glickstein, a senior retirement
consultant at Towers Watson. “A one-time strengthening of mortality assumptions
alone is responsible for about 40% of the increased deficit. We also found that
plan sponsors that used liability-driven investing strategies in 2014 had better
results, as the declining discount rates were matched with very strong returns
for long corporate and Treasury bonds.”
Pension plan assets increased by an estimated 3% in 2014,
from $1.36 trillion at the end of 2013 to an estimated $1.4 trillion at the end
of last year, reflecting an underlying investment return of about 9%. The
analysis also found that investment returns varied significantly by asset
class.
Large-cap U.S. equities were up roughly 14%, while
international equities declined by nearly 5%. The Towers Watson analysis
estimates that companies contributed $30 billion to their pension plans in 2014
— 29% less than in 2013 and the lowest level of contributions since 2008.
Contributions have declined steadily recently partly due to legislated funding
relief.
“For most plan sponsors, the discussion around the
Society of Actuaries’ new study on the mortality of pension plan participants
was the most significant pension event of the year,” said Dave Suchsland, a
senior retirement consultant at Towers Watson. “The study drew the attention of
plan sponsors and auditors, resulting in many plan sponsors updating that key
assumption.”
“We experienced another big year of pension de-risking in
2014, with significant lump sum buyout and annuity purchase activity. Given the
change in funded status, we expect many plan sponsors will need to reevaluate
their retirement plan strategies in 2015,” added Suchsland. “Last year’s
results surrendered most of the funded status gains earned in 2013. This year
will most likely bring higher expense charges and unless there is an uptick in
interest rates or equity market performance, eventually additional contribution
requirements.”
About the Analysis
The companies analyzed represent 411 Fortune 1000
firms with December fiscal-year-end dates for which complete data were
available. The 2014 figures are estimates of U.S. plan assets and liabilities.
The earlier figures are actual. Actual year-end 2014 results will not be
publicly available until spring 2015.
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global
professional services company that helps organizations improve performance
through effective people, risk and financial management. With 15,000 associates
around the world, the company offers consulting, technology and solutions in
the areas of benefits, talent management, rewards, and risk and capital
management. Learn more at towerswatson.com.
Source: Towers
Watson
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