Despite healthy employer contributions and strong investment returns, U.S. corporations booked a deficit in their pension funding levels last year due primarily to sustained low interest rates that lifted liabilities to record highs, reports Towers Watson.
The firm analyzed pension disclosures for the 100 largest pension plan sponsors among publicly traded companies. It found that at year-end 2012, the pension deficit reached a collective $295.2 billion, a 17 percent jump from the end of 2011 when the tally was $252.7 billion. That drop further represents a significant turnaround from 2007 when the same firms had a pension surplus of $86 billion. Overall, the aggregate funding ratio dropped by 2 percentage points, from 79 percent funded at the end of 2011 to 77 percent at year-end 2012.
This year’s survey illustrated the impact of lump-sum buyouts and annuity purchases, which occurred at an “unprecedented” level, on both assets (due to contributions and returns) and liabilities (attributable to low interest rates). Plan assets grew by 6 percent, while liabilities increased by 8 percent. Without the settlement activity, obligations would have climbed by 12 percent and assets would have risen by 10 percent. Moreover, those lump-sum buyouts and annuity purchases trimmed the aggregate funded ratio by less than 1 percent.
“Buoyed by the stock market and large contributions, employers have rebuilt their pension plan assets to a point before the 2008 market collapse,” said Alan Glickstein, a senior consultant at Towers Watson, in a statement. “However, that has been more than offset by growth in liabilities. Four consecutive years of declining interest rates have helped push liabilities 40 percent higher and left companies with even larger deficits than before.”
Employer contributions rise
In 2012, employers deposited $45.1 billion in their pension plans, up from $38.9 billion in 2011, the largest contribution employers have made in the past five years. The report notes that to keep funding levels up, companies contributed twice the amount of benefits accrued last year.
In an effort to temper investment risk, many plan sponsors have shifted from public equities to fixed income and alternative investments over the past few years. Since 2009, average allocations to equities have fallen 10 percentage points, while allocations to fixed-income investments have risen by 8 percentage points.
Yet in 2012, the movement away from equities slowed. Towers Watson reports that of the 95 companies that reported target asset allocation strategies for 2012 and 2013, only three reduced their target equity allocations by 10 percent or more compared to 16 for 2011.
A good start to 2013
This year may bring better results due to a strong equities market in the first quarter and a 20-basis-point increase in interest rates.
Dave Suchsland, a senior consultant at Towers Watson, noted in a statement that although there is a long way until the end of the year, funding ratios are moving in the right direction.
But if interest rates don’t continue to swing upward and equity returns weaken, plan sponsors may be forced to plow more cash into their plans to buoy the funded status for the full year, Suchsland cautioned.
Other findings from the report include:
- In 2007, over half (51 percent) of the largest 100 U.S. sponsors had fully funded pension plans. In 2012, only five companies in this group were fully funded.
- The average discount rate at year-end 2012 was 4.01 percent, a decline from 4.79 percent in 2011 and 5.46 percent in 2010.