US Corporate Pensions’ Funded Status Surges in 2021

Increasing funding levels are expected to spur another big year for pension risk transfers.

The average funded status of the largest US corporate defined benefit (DB) pension plans surged in 2021 to its highest level in 14 years thanks to strong investment returns and rising interest rates, according to a report from Willis Towers Watson.

“Defined benefit plan sponsors made great headway in 2021 on their path toward full funding, something many plans haven’t experienced since prior to the 2008 financial crisis,” Joseph Gamzon, managing director, retirement, Willis Towers Watson, said in a statement. “And since 2008, many sponsors have better positioned their plans relative to market risk, primarily through changes in investment allocation and settlement activity.”

The aggregate pension funded status of the plans was an estimated 96% as of the end of 2021, up from 88% at the end of 2020, according to pension plan data for 361 Fortune 1000 US companies that sponsor DB plans with a December fiscal year-end date. Willis Tower Watson said it was the highest funded level since 2007, which was also the last year DB plans of the Fortune 1000 were fully funded.

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The combined assets for the pension plans edged slightly higher (up 1%) during the year to $1.67 trillion, with estimated average investment returns of 8.9%. Returns varied significantly by asset class, with domestic large capitalization equities returning an average of 29%, while domestic small/mid-capitalization equities saw gains of 18%. Aggregate bonds lost 2%, while long corporate and long government bonds, which are often used in liability-driven investing (LDI) strategies, had losses of 1% and 5%, respectively.

The report also said the aggregate funding deficit for the plans fell sharply during the year to an estimated $63 billion, from $232 billion as of the end of 2020. Meanwhile, pension obligations decreased 8% to an estimated $1.74 trillion at the end of 2021 from $1.89 trillion the previous year.

Willis Tower Watson said the growth in assets year-over-year was limited by a record year in pension risk transfers (PRTs) and cash contributions that were lower than typical years.

“The improvement in funded status coupled with changes in the funding rules provide plan sponsors an opportunity to move their pension strategy forward in 2022,” said Jennifer Lewis, senior director, retirement, Willis Towers Watson. “Depending on the sponsor’s objectives, that strategy may include executing more pension risk transfers, positioning the plan for the long term, or a combination of both.”

US single premium buy-out sales soared in the third quarter to $15.8 billion, a 243% jump and more than three times the $4.6 billion recorded during the same period the previous year, according to a survey from the Secure Retirement Institute (SRI). It is the second highest quarter for sales since the fourth quarter of 2012.

“It’s looking like 2021 will be another great year for the PRT market,” said Mark Paracer, SRI’s assistant research director.

Related Stories:

US Pension Buyout Sales More Than Triple in Q3 to $15.8 Billion

Special Report: Will Pension Risk Transfers Someday Control All DB Plans?

Rising Funded Levels, PBGC Premiums Spur Pension Buyout Record

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Virus Caseload Surges, but So Does the Stock Market

Despite the US seeing a record 1 million cases Monday, the S&P 500 keeps powering upward.

Pandemic? What pandemic? The stock market has shrugged off the latest surge of COVID-19 cases—which just hit 1 million in the US on Monday—and gone on to set records.

The S&P 500 dipped slightly this morning in apparent profit taking, down 0.18%, after a 0.64% gain Monday, which extended its all-time high. At the same time, Apple’s valuation on Monday crossed the $3 trillion mark, an astounding achievement, especially considering its market cap surpassed $2 trillion only two years ago. (The stock dropped back a little today, with the rest of the market.)

The market’s continued growth demonstrates that investors believe the coronavirus scourge may finally be abating, analysts say. And, at least in the US, a repeat of the 2020 lockdowns hasn’t occurred, with their heavy economic consequences.

The case for optimism hinges partly on reports from around the world, such as from South Africa, that the number of COVID-19 cases and hospital stays appears to be peaking.

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A research note from Deutsche Bank analyst Henry Allen and his team argued that the expansion in vaccine availability will drive down the pandemic’s impact. This year, it went on, “will begin to see the increasing use of antiviral pills that have been shown in trials to further reduce the chances of hospitalization and death.”

Meanwhile, there are tentative signs that the supply bottleneck may also be easing, according to the Institute for Supply Management (ISM). Its survey found that factory activity, which had been running hot due to higher demand, had eased slightly last month, while prices that manufacturers pay for raw materials also had come down a bit.

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