Survey: While Still Below Pre-Crisis Peak, Pension Funding Improves

Strong gains in equities and higher employer contributions have pushed the nation's largest employer-sponsored pension plans toward higher funding levels in 2010, Towers Watson reveals.

(April 29, 2011) — The largest employer-sponsored pension plans in the United States improved their funding levels in 2010, with investment returns averaging 13%, according to Towers Watson.

Yet, funding levels remain far below their pre-crisis peaks in 2007, when plans were 104.2% funded on average. The consultancy’s analysis of financial statements filed by sponsors of the 100 largest pension programs found that plans were 83.4% funded on average at the end of 2010, an improvement from 2009, when plans on average were 80.2% funded.

The firm indicated that low interest rates contributed to pension challenges, echoing statements from the consultancy’s January survey that concluded that, with low interest rates expected to continue, there will be further delay before many Canadian defined benefit (DB) pension plans become fully funded.

“Employer contributions helped the funded status of many pension plans in 2010,” Mike Archer, a senior retirement consultant at Towers Watson, said in a statement on their latest study. “However, historically low interest rates translated to lower discount rates, which significantly increased plan liabilities,” he said, noting that with lower assumed interest rates, many employers find themselves making only modest headway to reduce their pension deficits.

In total, the plans had a deficit of $172.2 billion at the end of 2010, an improvement compared with the aggregate deficit of $181.8 billion at year-end 2009 and $194.4 billion at year-end 2008. At year-end 2007, the plans had a combined surplus of $94.6 billion. Furthermore, the analysis found that assets held by the plans rose roughly 10% in 2010 to $926.3 billion.

“The outlook for changes in funded levels this year and beyond remains uncertain,” Archer concluded. “While we anticipate further improvement this year, largely due to employer contributions, the path to full funding is likely to be a long one. Barring a significant extension of the capital market recovery or a big increase in interest rates, employers will have to contribute even more to meet expected increases in minimum required contributions and to eliminate the funding shortfalls of the past few years.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742