Corporate Pension Fund Levels Stagnate in 2016

Low interest rates negated positive returns and higher contributions, according to Willis Towers Watson.

Corporate pension funding showed no improvement over the last year.

Despite a stock market rally in recent months, funded status among the largest US plan sponsors changed little from the previous two years due to continued low interest rates.

Aggregate pension plan funding levels were 80% in 2016, virtually unchanged from the 81% seen in both 2015 and 2014, according to Willis Towers Watson analysis of 410 Fortune 1000 companies sponsoring U.S. defined benefit pension plans.

This is despite an increase in total pension plan assets to $1.31 trillion last year, up from $1.30 trillion at the end of 2015. Overall investment returns for the year averaged 6.7%, while company contributions also increased significantly from last year.

Companies contributed $35 billion to their pension plans in 2016 compared to $31 billion in 2015. But lower rates translated to liability increases, offsetting the contributions and returns.

“Rising interest rates and the stock market rally following the recent presidential election helped turn around what, to that point, had been a tough year for the funded status of corporate pension plans,” said Alan Glickstein, senior retirement consultant at Willis Towers Watson. “Before the election, pension plans were on track to decline by roughly five percentage points, as interest rates had dropped considerably over the first half of the year. However, an end-of-year jump in interest rates, coupled with strong equity returns in the stock market resulted in a rebound in funded status.”

While 2016 pension obligations were up to $1.64 trillion from $1.61 trillion in 2015, the pension deficit increased $17 billion to $325 billion from the 2015 figure of $308 billion.

The analysis showed legislated funding relief was to blame for declining employer contributions over the last several years.

“Plan sponsors will want to keep a close watch on two key developments as we move into the new year — whether interest rates continue to rise and President-elect Donald Trump’s promise for tax reform becomes reality,” said Dave Suchsland, senior retirement consultant at Willis Towers Watson. Both of these developments will certainly motivate employers to evaluate their pension de-risking strategies and consider implementing lump sum buyouts or annuity purchases.”

Related: Russell: Pensions Still Reeling from 2008