The funded status of the nation’s largest corporate pension plans started and finished 2020 at the same level. Declining interest rates caused pension obligations to grow, offsetting gains from investments in equities and bonds, according to an analysis by Willis Towers Watson.
The company examined pension plan data for 366 Fortune 1000 companies that sponsor defined benefit pension plans.
Results indicate that the aggregate pension funded status is estimated to be 87% at the end of 2020, unchanged from 87% at the end of 2019.
The analysis also found the pension deficit is projected to be $233 billion at the end of 2020, slightly higher than the $230 billion deficit at the end of 2019. Pension obligations increased 5% from $1.75 trillion in 2019 to an estimated $1.83 trillion in 2020.
“While funded status rebounded from a disastrous eight-percentage-point drop in the first quarter, plan sponsors ended 2020 frustrated by the lack of progress in shoring up their plans,” Jeff Brown, managing director of Retirement with Willis Towers Watson, said in a statement. “Continued declines in interest rates have significantly increased liabilities, leaving plans’ funded status levels stuck in neutral for the past three years despite stellar investment performance and significant contributions.”
Assets
Pension plan assets increased in 2020 from $1.52 trillion at the end of 2019 to an estimated $1.60 trillion at the end of 2020. Overall investment returns are estimated to have averaged 12.9% in 2020, although returns varied significantly by asset class.
Domestic large capitalization equities grew 18%, while domestic small/mid-capitalization equities realized gains of 20%. Aggregate bonds recognized gains of 8%, while long corporate and long government bonds, typically used in liability-driven investing strategies, realized gains of 13% and 18%, respectively.
“Over the past several years, declining interest rates have erased the gains from strong investment performance,” added Monica Martin, senior director of Retirement with the company. “With limited improvement in funding levels and a low interest rate environment, sponsors will want to consider the effects the pensions may have on corporate earnings, free cash flow and outlook for future investment performance.”