During 2012, aggregate funded status1 for defined benefit (DB) plans in the Towers Watson Pension 100 (TW Pension 100)2 fell from 79% to 77%. Assets in these plans finally rebounded to 2007 levels, but liabilities jumped by roughly 40% over the 2008-2012 period. The results are based on just-reported pension disclosures from the Securities and Exchange Commission 10-K filings of 100 publicly traded U.S. sponsors of large pension plans with year-end 2012 fiscal dates.

This annual analysis3 examines, as of year-end 2012, reported funding results, the discount rate used to measure liabilities, target asset allocation policy for 2013, return on plan investments and sponsors' 2012 contributions to their plans. All results represent historical values for companies in the 2012 TW Pension 100.

Funded status declines for second year running

Between 2011 and 2012, assets in TW Pension 100 plans increased by 6%, and plan liabilities grew by 8%. Despite strong investment returns, large plan contributions (discussed later) and declining interest rates, both assets and liabilities grew less than expected. This was because, according to explicit disclosures, at least 12 of the TW Pension 100 sponsors offered lump-sum buyouts or executed annuity purchases for certain DB plan participants in 2012, which reduced aggregate assets and liabilities by roughly $42 billion.4

The pension deficit jumped from $252.7 billion to $295.2 billion — an increase of $42.5 billion over the year (Figure 1).

Figure 1. Aggregate year-end funded status for TW Pension 100 ($ billions), 2007-2012

Towers Watson Media

Source: Towers Watson

Between year-end 2011 and year-end 2012, the pension deficit for these companies grew by 17%. Since year-end 2007, the gap between PBO and plan assets has increased by $381.6 billion.5

Following the 2008 stock market collapse, pension plan sponsors have been slowly rebuilding plan assets, finally achieving full recovery last year (through both investment returns and significant contributions). While that is good news, four consecutive years of declining interest rates pushed liabilities 40% higher, leaving companies with larger deficits than before.

At year-end 2012, the average funded percentage for the TW Pension 100 was 77.8% — compared with 78.5% at year-end 2011 and 103.8% at year-end 2007 (Figure 2). For the first time in this analysis, average funded status (77.8%) is slightly higher than aggregate funded status (77.4%), indicating that the smaller of these large plans are slightly more well-funded than their relatively larger counterparts.

Figure 2. Funded status (%) for TW Pension 100, 2007-2012

Towers Watson Media

Source: Towers Watson

Figure 3 depicts the distribution in funded status percentages since 2007 for these same plan sponsors. The distribution shifted very slightly over the last year. At year-end 2011, 53% of these companies’ plans had funding levels between 60% and 79.9%, rising slightly to 54% one year later. Among the same group of sponsors, only five companies’ plans were fully funded for 2012 compared with 51 for 2007.

Figure 3. Distribution of funded status for TW Pension 100, 2007-2012

Towers Watson Media

Source: Towers Watson

Figure 4 shows changes in funded status from the 2011 to 2012 plan year. Funded status declined for 55% of these companies, although most changes (increases or decreases) in funding levels were minor. During the year, 81% of sponsors realized a shift of plus or minus 4.9% or less.

Figure 4. Changes in funded status percentage for TW Pension 100, 2011-2012

Towers Watson Media

Source: Towers Watson

Discount rates continue to fall

Over 2012, the growth in plan obligations was mostly caused by continuing declines in the interest rates used to measure pension liabilities, which fell for the fourth consecutive year. From 2011 to 2012, the average discount rate fell by 78 basis points — from 4.8% to 4.0% — as shown in Figure 5. Interest rates have fallen by an average of 239 basis points since 2008.

Figure 5. Average year-end discount rate assumptions for TW Pension 100, 2007-2012

Towers Watson Media

Source: Towers Watson

Sponsors' slow but steady shift to fixed-income allocations

We next analyze pension asset allocation strategies from 2009 through 2013 (Figure 6).6 Over the last few years, plan sponsors have been gradually adjusting their portfolios to reduce investment risk relative to liabilities — shifting from public equities to fixed-income and alternative investments. Since 2009, average allocations to public equities have fallen by 10 percentage points, while allocations to fixed-income investments have risen by 8 percentage points.

The shift slowed over the last year. Of 95 companies that reported target asset allocation strategies for 2012 and 2013, only three reduced their target equity allocations by 10% or more, versus 16 for 2011.

Figure 6. Average target asset allocation percentages for TW Pension 100, 2009-2013

Towers Watson Media

Source: Towers Watson

For 2013, aggregate results (weighted by DB plan assets) differ from average results, which also occurred in earlier analyses. On an aggregate level, sponsors hold more debt than public equity, and real estate and other holdings are also larger, showing that bigger TW Pension 100 plans hold more fixed-income and alternative investments than smaller plans in the group.

Investment returns were strong

During 2012, market returns outperformed expectations at the beginning of the year. At year-end 2012, aggregate and average (unweighted) investment returns were 12.4% and 12.5%, respectively (Figure 7). Substantial investment gains over 2012 were mostly due to strong returns in equity and long-duration fixed-income markets.

Figure 7. Investment returns for TW Pension 100, 2008-2012

Towers Watson Media

Source: Towers Watson

Another year of large employer contributions

Again this year, companies made sizable contributions to their plans. The 2012 Moving Ahead for Progress in the 21st Century Act (MAP-21) allowed sponsors to significantly reduce their minimum required contributions starting with the 2012 plan year.7 Nevertheless, aggregate contributions from the TW Pension 100 were the highest of the last five years, as many sponsors chose to make large discretionary contributions to keep funding levels up.

For 2012, sponsors contributed $45.2 billion, up from $38.9 for 2011. Total service cost (benefits earned during the previous year) was $20.7 billion in 2012. The median (unweighted) ratio of contributions to service cost for companies in this analysis was 2.4. So companies contributed more than twice the amount of benefits accrued in 2012. Figure 8 shows actual contributions for plan years 2008 to 2012.

Figure 8. Plan contributions from the TW Pension 100 ($ billions), 2008-2012

Towers Watson Media

Source: Towers Watson

Conclusion

For the fourth year running, declining interest rates pushed pension liabilities to record highs. Unfortunately for plan sponsors, even strong investment returns and hefty plan contributions could not offset the higher liabilities, resulting in an aggregate funding loss of two percentage points: Aggregate funded status dropped from 79% in 2011 to 77% in 2012.

Aggregate pension deficits climbed from roughly $253 billion at year-end 2011 to $295 billion at year-end 2012. If interest rates do not go up, plan sponsors will have to realize even stronger equity returns and/or contribute more to their plans to improve funded status.


endnotes

  1. A company’s pension funded status is the ratio of pension assets to projected benefit obligation (PBO). Aggregate funded status for the TW Pension 100 is the ratio of (a) the sum of all pension assets to (b) the sum of all PBO. Average funded status is calculated by averaging the sum of each company’s funded status percentage.
  2. The TW Pension 100 for 2012 consists of sponsors of the 100 largest U.S. pension programs among U.S. publicly traded organizations, ranked by PBO at year-end 2011. For some companies, the allocation of disclosed PBO and assets between U.S. and non-U.S. is estimated.
  3. See “Towers Watson Pension 100: 2011 Disclosures of Funding, Discount Rates, Asset Allocations and Contributions,” Insider, April 2012; “Towers Watson Pension 100: 2010 Disclosures of Funding, Discount Rates, Asset Allocations and Contributions,” Insider, April 2011; “Towers Watson Pension 100: 2009 Disclosures of Funding, Discount Rates, Asset Allocations and Contributions,” Insider, April 2010. The results vary in different analyses due to annual turnover in the TW Pension 100 list.
  4. While the majority of the 12 companies used bulk lump sums, the reduction is largely the result of two companies making significant annuity purchases in 2012.
  5. On a global basis, aggregate funding results for these companies are similar to those mentioned above. For all pensions, domestic and foreign, total PBO increased from $1.48 trillion to $1.62 trillion. Global pension assets also rose from $1.16 trillion to $1.24 trillion by year-end 2012. So on a global basis, aggregate funded status dropped from 78% to 76% by the end of 2012.
  6. Target allocation information is usually depicted in ranges in pension disclosures. For purposes of this study, the midpoint of ranges was taken and results were normalized to total 100%.
  7. See "Pension Plan Funding Obligations Under MAP-21," Towers Watson Insider, September 2012.