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 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.
Also see: “Top 10 401(k) plan trends for 2016.”
“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.
Also see: “Top 30 401(k) plans.”
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.
Also see: “DB plans advised to be proactive in 2016.”
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.
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