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The funded status of the nation’s largest corporate pension plans slipped at the end of 2018 as a sharp decline in the stock market during the fourth quarter offset what looked to be a second consecutive year of improved funding.
Willis Towers Watson analyzed pension plan data for 389 Fortune 1000 companies that sponsor defined benefit (DB) pension plans and have a December fiscal-year-end date. Results indicate that the aggregate pension funded status is estimated to be 84% at the end of 2018, compared with 85% at the end of 2017. After the first nine months of 2018, the aggregate pension funded status stood at 90%. The analysis also found the pension deficit is projected to be $255 billion at the end of 2018, slightly lower than the $260 billion deficit at the end of 2017.
“Pension plans had been on track for another year of improved funding through the third quarter of 2018 as a result of higher interest rates, relatively stable equity markets and solid contributions,” said Jennifer DeMeo, senior director, Willis Towers Watson. “However, the steep decline in the equities market during the fourth quarter, particularly in December, negated what had been a very positive year.”
According to the analysis, pension plan assets declined in 2018 from $1.48 trillion at the end of 2017 to an estimated $1.33 trillion at the end of 2018. Overall investment returns are estimated to have averaged a 4.7% loss in 2018, although returns varied significantly by asset class. Domestic large capitalization equities lost 4% while domestic small/mid-capitalization equities realized losses of 10%. Aggregate bonds provided no return (0%); long corporate and long government bonds, typically used in liability-driven investing strategies, realized losses of 7% and 2%, respectively.
The Willis Towers Watson analysis estimates these companies contributed $47 billion to their pension plans in 2018, as many plan sponsors took advantage of deductions at the older, higher tax rates that existed before the tax law changes. Total pension obligations declined from $1.74 trillion in 2017 to an estimated $1.59 trillion in 2018.
“The seesaw year in funded status we experienced in 2018 is a perfect example of why plan sponsors need to review their overall pension management strategy as they move into 2019,” said Royce Kosoff, managing director, Willis Towers Watson. “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. 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.”