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The funded status of the nation’s largest corporate pension plans edged up slightly in 2019, as historically low interest rate levels mostly offset the strongest investments gains witnessed by plan sponsors since 2003.
This is according to an analysis by Willis Towers Watson, which examined pension plan data for 376 Fortune 1000 companies that sponsor United States defined benefit pension plans and have a December fiscal year end date.
Results indicate that the aggregate pension funded status is estimated to be 87% at the end of 2019, compared with 86% at the end of 2018. The analysis also projected pension deficit at $216 billion at the end of 2019, slightly lower than the $222 billion deficit at the end of 2018. Pension obligations increased 9% from $1.58 trillion in 2018 to an estimated $1.72 trillion in 2019.
“Significant gains experienced in both the stock and bond markets should have bolstered the financial health of corporate pension plans in 2019,” said Joseph Gamzon, senior director, retirement, Willis Towers Watson. “However, interest rates were at historically low levels and experienced the largest one-year drop in two decades, resulting in a huge increase in plan obligations and little overall change in the plans’ funded status.”
According to the analysis, pension plan assets increased in 2019 from $1.36 trillion at the end of 2018 to an estimated $1.50 trillion at the end of 2019. Overall investment returns are estimated to have averaged 19.8% in 2019, although returns varied significantly by asset class. Domestic large capitalization equities grew 32%, while domestic small/mid-capitalization equities realized gains of 28%. Aggregate bonds recognized gains of 9%, while long corporate and long government bonds, typically used in liability-driven investing strategies, realized gains of 23% and 15%, respectively.
The analysis estimates these companies contributed $26.3 billion to their plans in 2019 — roughly half of what they contributed in 2018, when many plan sponsors took advantage of the higher tax deductions for pension contributions that existed before the Tax Cuts and Jobs Act of 2017. The larger deduction is no longer available to plan sponsors.
“2019 was a year of extremes, with historically low interest rates and high investment returns,” said Jennifer Lewis, senior director, retirement, Willis Towers Watson. “As we move into 2020, these conditions will cause employers to face growing pressure on their plans’ expected rate of return assumptions at the same time as they prepare for higher required cash contributions due to the upcoming expiration of pension funding relief. Sponsors will want to keep an eye on interest rates as increases from their current low levels could create opportunities to reevaluate their investment strategies and consider a range of risk reduction options.”