Strong Investment Gains Fail to Boost US Corporate Pensions in 2020

Despite returns of nearly 13%, US corporate plans’ funded level remained flat for the year, thanks to falling rates, Willis says.

Despite earning double-digit investment gains last year, the nation’s largest corporate pension plans saw their aggregate funded level remain flat for the year as growing pension obligations, spurred by falling interest rates, canceled out the strong returns.

Based on pension plan data for 366 Fortune 1000 companies that sponsor US defined benefit (DB) pension plans with a fiscal year ending in December, the aggregate pension funded status was an estimated 87% at the end of 2020, unchanged from the end of 2019, according to analysis from Willis Towers Watson. And this was after the plans’ investments returned an average of 12.9% during the year.

The analysis also found that the projected pension deficit rose slightly, to $233 billion at the end of last year from $230 billion at the end of 2019, thanks to a 5% increase in pension obligations to an estimated $1.83 trillion from $1.75 trillion in 2019.

“While funded status rebounded from a disastrous 8 percentage-point drop in the first quarter, plan sponsors ended 2020 frustrated by the lack of progress in shoring up their plans,” Jeff Brown, Willis Towers Watson’s managing director of retirement, said in a statement.

“Continued declines in interest rates have significantly increased liabilities, leaving plans’ funded status levels stuck in neutral for the past three years despite stellar investment performance and significant contributions.”

Leading the strong investment returns for the plans were domestic small/mid-cap equities, which returned 20% during the year, while domestic large cap equities climbed 18%. Long government and long corporate bonds, which are often used in liability-driven investing (LDI) strategies, saw gains of 18% and 13%, respectively, while aggregate bonds returned 8%.

As a result, aggregate pension plan assets for the DB funds increased to an estimated $1.6 trillion at the end of 2020 from $1.52 trillion at the end of the previous year.

“Over the past several years, declining interest rates have erased the gains from strong investment performance,” said Monica Martin, Willis Towers Watson’s senior director of retirement.

“With limited improvement in funding levels and a low interest rate environment, sponsors will want to consider the effects the pensions may have on corporate earnings and free cash flow while also considering the outlook for future investment performance.”

The aggregate funded level for the plans analyzed has barely budged in recent years, rising to 87% last year from 85% in 2017. Still, the funded level for the plans is at its highest level since 2013, when it was 89%.

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