Financial health of large corporate pension plans improved modestly in 2017

The funded status of the nation’s largest corporate pension plans improved modestly at the end of 2017 compared with the end of 2016, according to recent research from Willis Towers Watson. This improvement was due to strong market returns and larger-than-expected employer contributions. According to the Willis Towers Watson analysis, the aggregate pension funded status is estimated to be 83% at the end of 2017, compared with 81% at the end of 2016.
Willis Towers Watson examined pension plan data for the 389 Fortune 1000 companies that sponsor U.S. defined benefit pension plans and have a December fiscal-year-end date. The analysis also found that the pension deficit is projected to have decreased to $292 billion at the end of 2017, compared with a $317 billion deficit at the end of 2016.
“Strong stock market performance throughout the year and robust employer contributions to their pension plans helped to boost funded status to its highest level since 2013 after several stagnant years,” said Matthew Siegel, a senior consultant at Willis Towers Watson. “Several plan sponsors contributed more to their plans last year than originally expected, most likely in response to rising Pension Benefit Guaranty Corporation premiums and growing interest in de-risking strategies, and potentially in anticipation of lower future corporate rates from tax reform. The improved funded position occurred even though pension discount rates finished the year down approximately 50 basis points from the beginning of the year.”
According to the analysis, pension plan assets increased in 2017, from $1.33 trillion at the end of 2016 to an estimated $1.43 trillion at the end of 2017. Overall investment returns are estimated to have averaged 13% in 2017, although returns varied significantly by asset class. Domestic large-capitalization equities returned 22% while domestic small-/mid-capitalization equities earned 17%. Aggregate bonds provided a 4% return; long corporate and long government bonds, typically used in liability-driven investing strategies, earned 12% and 9%, respectively.
The Willis Towers Watson analysis estimates that these companies contributed $51 billion to their pension plans in 2017, nearly double the amount needed to cover benefits accruing during the year. These contributions were higher than the $43 billion employers contributed to their plans in 2016.
Total pension obligations moved from $1.65 trillion to an estimated $1.72 trillion with the biggest changes being the increase for lower discount rates largely offsetting the decrease for benefits paid.
“The uptick in funded status is welcome news for many plan sponsors,” said Beth Ashmore, senior consultant at Willis Towers Watson. “As we look to 2018, we anticipate employers will begin to digest the new tax bill and what it may mean for their benefit plan financing. Employers should consider their broader pension management strategy as they make that evaluation, which may include reviewing their investment strategy or implementation of pension de-risking strategies, such as an annuity purchase.”

Source: Willis Towers Watson press release, January, 2018.
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