The funded status of the nation’s largest corporate
defined benefit plans ended 2015 at 82%, the same as it ended 2014, due in
large part to a rise in interest rates that were offset by a weak global stock
market, according to research by consulting firm Towers Watson, which merged
today with Willis Group Holdings PLC to form Willis Towers Watson.
The data looked at pension plan data from 413 Fortune
1000 companies that sponsor pension plans and found that the pension deficit
narrowed slightly by $28 billion to $291 billion at the end of 2015, compared
to a $319 billion deficit at the end of 2014.
So what does that mean for 2016? It is hard to predict,
says Alan Glickstein, senior retirement consultant for Willis Towers Watson.
“The way the accounting rules work is they measure on the day,” he says. Plan
sponsors measure their financials on Dec. 31 but when there are drastic changes
the day before or the day after the measurement, it can have profound effects.
“These plans project out over 40 or 50 years but look
different one day early or one day later. It is a funny mixture of things that
don’t make sense. These are long-term propositions but are measured on a daily
basis. It is quite challenging,” Glickstein says, adding that 2016 should be an
interesting year for DB plans.
“An increase in corporate bond rates in advance of the
Fed’s recent interest rate decision, combined with a flat global stock market,
contributed to keeping pension plans in roughly the same financial shape as the
previous year,” he says. “While pension obligations declined last year, do did
assets. There was a lot of movement in the funded status throughout the year,
but at the end of the year, essentially nothing changed overall. In contrast,
the preceding two years were more volatile, one up and one down.”
Willis Towers Watson found that pension plan assets fell
by an estimated 6% in 2015, from $1.41 trillion at the end of 2014 to about
$1.33 trillion at the end of 2015. This “reflects increases of roughly 2% due
to investment returns and employer contributions offset by a decline of 8% from
benefit payments and settlement transactions,” the report said.
Investment returns varied significantly by asset class,
with domestic large-cap equities increasing by 1%, while domestic
small-/mid-cap equities declined 3%.
“Aggregate bonds increased by less than 1%, and long
credit bonds, typically used in liability-driven investing strategies, fell by
5%. With asset returns that were insufficient to keep up with the roughly 4%
interest accruing on the obligations, the balance was made up by the decline in
the obligation produced by the rising interest rates,” according to the
analysis.
Willis Towers Watson estimated that companies contributed
$32 billion to their pension plans in 2015 but these were insufficient to cover
new benefits earned by employees so it didn’t help the overall funded status of
corporate-sponsored pension plans in 2015.
Companies continued to de-risk their plans in 2015, with
lump-sum payouts and group annuity purchases. It was the second most active
recent year for annuity purchases and Willis Towers Watson expects employers
will continue to evaluate their retirement plan strategies this year, says Matt
Herrmann, a senior retirement consultant at Willis Towers Watson.
Corporate pension plans haven’t been fully funded since
just before the Great Recession hit in 2008, and although pensions ended the
year stable at 82%, it would have been better if they had remained stable at
100%, says Glickstein.
“The big question I have is, are the current level of
interest rates the new normal or not? That is the big question. If we really
are in an environment that 4% rates are what we can expect, then 82% is real
and a good representation. If these rates are an aberration and rates will go
up, plans will become better funded quickly unless the market doesn’t do well.
There’s a lot riding on this question,” he says.
Source: Employee
Benefit Adviser
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