By Pension and Benefits Editorial Staff
The funded status of the nation’s largest corporate pension plans fell by eight percentage points during the first quarter of 2020, driven primarily by declines in equity markets, according to recent research from Willis Towers Watson. The study found that the aggregate pension funded status is estimated to be 79 percent as of March 31, 2020, compared with 87 percent at the end of 2019. That’s the lowest funded status plans have experienced since 2012, when the year-end funded status stood at 77 percent, Willis Towers Watson noted.
Willis Towers Watson examined pension plan data for 376 Fortune 1000 companies that sponsor U.S. defined benefit pension plans. The analysis found the pension deficit is projected to be $365 billion as of March 31, 2020, higher than the $229 billion deficit at the end of 2019. Unlike pension assets, pension obligations increased minimally from $1.75 trillion at the end of 2019 to $1.76 trillion at March 31, 2020.
“Corporate pension plans took a hit in the first quarter,” said Royce Kosoff, managing director of retirement at Willis Towers Watson. “As a result, aggregate funding levels declined to a level we haven’t seen since 2012. Sponsors recently gained some reprieve with funding requirements deferred for 2020 but will likely face significant cost increases in 2021 and beyond. This serves as a fresh reminder for plan sponsors to carefully review their funding policy, investment allocation and overall risk management approach.”
Pension plan assets decreased during the quarter from $1.52 trillion at the end of 2019 to $1.40 trillion as of March 31, 2020. Overall investment returns are estimated to have fallen by 7 percent in the first quarter, although returns varied significantly by asset class. Domestic large capitalization equities dropped significantly by 20 percent, while domestic small/mid-capitalization equities fell by 30 percent. U.S. aggregate bonds recognized gains of 3 percent, while long corporate and long government bonds, typically used in liability-driven investing strategies, realized drastically different results. Long corporate bonds realized losses of 5 percent while long government bonds realized gains of 21 percent.
“The fallout from a volatile first quarter was not uniform across plan sponsors,” said Richard McEvoy, U.S. lead of delegated integrated solutions at Willis Towers Watson. “On the growth asset side, the composition of growth assets was the primary driver of results with diversified allocations mitigating drawdowns. Rates and credit spreads also had a wild ride, and liability-driven investment strategies limited the damage to funding levels in many cases. A key element was how plan sponsors allocated between Treasuries and credit. Overall, we saw significant variations of outcomes, reflecting the wider variation in pension strategies taken today than in years past.”
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