Asset Management CultureJanuary 3, 2020

Corporate DB Funding Level Nudged Upward in 2019

Large company plans gain a point, to 87%, Willis Towers Watson says.

Reported by Larry Light

Corporate defined benefit pension funding levels inched up in 2019, as boffo stock market returns struggled to overcome the drag of lower interest rates from fixed-income investment.

The largest company plans rose to 87% funded last year from 86% in 2018, according to a study from Willis Towers Watson, the insurance brokerage and advisory firm.

Willis examined data from 376 of the Fortune 1000 that sponsor corporate DB plans and have a December ending date for their fiscal year. The overall deficit for the plans—the amount they are short from meeting their obligations to beneficiaries—stood at $216 billion at the end of 2019. That was slightly lower than the 2018 deficit of $222 billion. At the same time, pension obligations expanded by 9% to $1.72 trillion last year, from $1.58 trillion in the prior year.

“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 at Willis. “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.”

By Willis’ tally, the funding level has made progress since its 2008 low point of 77%, when the financial crisis devastated many a portfolio, both pension investments and others. In 2007, the year before, the funding level was at a comfortable 106%.

Another factor in last year’s funding was lower contributions from the pension-sponsoring companies, $26.3 billion. That was around half of what the companies plugged into their DB plans in 2018, when higher tax deductions were permitted for pension contributions. That feature died under the tax overhaul that Congress passed.

Overall, estimated investment returns for the plans last year were 19.8%, or $1.5 trillion. Domestic large-cap stocks rose 32%, while bonds in the aggregate increased 9%. Much of the bond returns were from capital gains, not from interest. Odds are that fixed-income won’t show even that much growth in 2020 because interest rates are unlikely to fall much further (the 10-year treasury yield is a full point lower today than it was 12 months ago). Declining rates translates to bond price increases.