Fourth–quarter stock volatility caused the funded status of the largest US corporate pension plans to take a hit in 2018, thwarting what was poised to be the second consecutive year of improved funding.
The plans, which had been on track to succeeding 2017’s 85% aggregate funded ratio, are estimated by consulting firm Willis Towers Watson to instead slip one percentage point in 2018, to 84% funded. Had the market continued to stay upbeat from October through December, the companies would be in the 90s, as the average pension funding levels were at 90% in September.
Assets also got dinged in the fourth quarter, with plan totals dropping to $1.33 trillion from 2017’s $1.48 trillion. The firm noted that overall investment returns were down 4.7% at the end of 2018, although these are not completely equity-driven as returns vary by the performance of each asset class.
On average, domestic large-cap stocks fell 4% while their small/mid-cap counterparts experienced 10% losses. The global equity return was minus 7.6%. Although aggregate bonds were flat, long corporate and long government bonds lost 7% and 2%, respectively.
Despite the small hiccup, the analysis determined that the pension deficit is still less than it was in 2017. Willis Towers Watson says total debt of the nation’s top plans was about $255 billion at the end of last year, compared to 2017’s $260 billion end-deficit.
Jennifer DeMeo, a senior director at the agency, said the Federal Reserve’s higher interest rates, “relatively stable” equity markets, and “solid” contributions were keeping the corporates in the clear to again improve funding.
“Toward the end of the third quarter, the pensions had increased from 85% the year prior to about 90%. That was largely driven by an increase in bond yields, which reduced the overall pension obligation, as well as significant contributions to the plans that some sponsors made in order to take advantage of the higher tax rates that were all before the tax laws changed,” she told CIO, adding that Q4’s negative equity markets were “the primary driver” that contributed to the funded status decrease.
According to the analysis, the examined companies contributed about $47 billion to their pension plans in 2018, as lots of plan sponsors took advantage of their deductions before the new tax laws went into action. Total obligations shrunk to $1.59 trillion in 2018, from 2017’s $1.74 trillion total.
Royce Kosoff, Willis Towers Watson’s managing director, called 2018’s “seesaw” the “perfect example of why plan sponsors need to review their overall pension management strategy” as they enter the new year.
“The volatility in the fourth quarter, and especially in December, which was one of the worst months since the Great Recession, demonstrates how quickly conditions change,” he said. “We expect sponsors will continue to express interest in risk management strategies, such as revisiting their investment approach or transferring obligations via an annuity purchase or through lump-sum buyouts.”
Willis Towers Watson analyzed pension data from 389 Fortune 1000 companies that sponsor US defined benefit plans with a fiscal year ended December 31.
DeMeo said that corporate plans in 2018 were continuing to shift some elements of their equity holdings into liability–driven investment strategies such as group annuity buyouts, but others were looking into growth assets.
“It’s really about having a strategy in place with an endgame in mind and having a path to get to that,” she said.
She expects more liability–driven investments to take place in the new year.
As for what corporate CIOs can do to prevent another funding slip, DeMeo says that while there is no “one size fits all” asset class, the chiefs will have to consider their “overall philosophy and strategy” and continue to do asset liability monitoring as well as determine “what makes sense in their current situation.”