During 2013, aggregate funded status1 for defined benefit (DB) plans in the Towers Watson Pension 100 (TW Pension 100)2 climbed from 77% to 89%. Assets in these plans continued to grow and higher interest rates reduced plan liabilities for the first time in years. 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 December fiscal year-end dates.

This annual analysis3 examines, as of year-end 2013, reported funding results, the discount rates used to measure liabilities, target asset allocation policy for 2014, return on investments and sponsors’ plan contributions. Where applicable, historical values shown are for companies in the 2013 TW Pension 100.

The gap between the projected benefit obligation (PBO) and plan assets veered from an $82 billion surplus in 2007 to a record-high $296 billion shortfall at year-end 2012 (Figure 1). The most substantive decline in the shortfall was seen in 2013, a year that ended with liabilities exceeding assets by $126 billion. By year-end 2012, four consecutive years of declining interest rates had pushed plan liabilities 42% higher than the December 2007 aggregate liability. That growth declined to 28% by the end of 2013.

Pension funded status improves during 2013, but large deficits remain

During 2013, assets in plans sponsored by the TW Pension 100 grew by 4%, while plan obligations declined by 9%.4 Asset growth was lower than expected for the second straight year, despite respectable investment returns and plan contributions (although contributions were smaller than in prior years). The lower growth resulted from lump sum buyouts offered by some DB plan sponsors in 2013, which reduced the overall value of assets and obligations.

The pension deficit for the TW Pension 100 declined from $295.5 billion in 2012 to $125.9 billion in 2013 — a decrease of $169.6 billion or 57% — the lowest pension deficit since the financial crisis.

Figure 1. Aggregate year-end funded status for TW Pension 100 ($ billions), 2007 – 2013
Towers Watson Insider - Figure 1. Aggregate year-end funded status for TW Pension 100 ($ billions), 2007 – 2013

Source: Towers Watson

At year-end 2013, the average funded percentage for the TW Pension 100 was 91.2%, up considerably from 77.9% at year-end 2012 — but still down from 103.3% at year-end 2007 (Figure 2). For the second year running, average funded status was slightly higher than aggregate funded status, indicating that plan funding was slightly lower among the largest of these plans.

Figure 2. Funded status (%) for TW Pension 100, 2007 – 2013
Towers Watson Insider - Figure 2. Funded status (%) for TW Pension 100, 2007 – 2013

Source: Towers Watson

Figure 3 depicts the distribution of funded status percentages since 2007 for the TW Pension 100, showing some major shifts during 2013. At year-end 2013, 81 of the TW Pension 100 had funding levels of 80% or higher, and 22 had fully funded plans. At year-end 2012, only 42 had funding levels of 80% or higher, and five had fully funded plans. While these jumps represent significant improvement, note that more than half of the TW Pension 100 had fully funded pensions before the financial crisis.

Figure 3. Distribution of funded status for TW Pension 100, 2007 – 2013
Towers Watson Insider - Figure 3. Distribution of funded status for TW Pension 100, 2007 – 2013

Source:  Towers Watson

Figure 4 shows changes in pension funded status from the 2012 to 2013 plan year. Funded status increased for all but one company over the last year, with the increases typically between 10 and 19.9 percentage points.

Figure 4. Changes in funded status for TW Pension 100, 2012 – 2013
Towers Watson Insider - Figure 4. Changes in funded status for TW Pension 100, 2012 – 2013

Source: Towers Watson

Discount rates rise during 2013

Lower plan obligations resulted mostly from higher interest rates, which ticked back up after falling for four years straight. From 2012 to 2013, the average discount rate increased 83 basis points — from 4.02% to 4.85% (Figure 5). Even given this recent increase, the average rate was 152 basis points lower than it was in 2008.

Figure 5. Average year-end discount rate assumptions for TW Pension 100, 2007-2013
Towers Watson Insider - Figure 5. Average year-end discount rate assumptions for TW Pension 100, 2007-2013

Source: Towers Watson

DB Plan sponsors continue shifting to fixed-income allocations

For several years now, plan sponsors have been gradually shifting asset allocations from public equities to fixed income and alternative investments to reduce investment risk relative to liabilities (Figure 6).5 Since 2009, average allocations to public equities have fallen by 12 percentage points, while allocations to fixed-income investments have risen by almost nine percentage points.

Figure 6. Average target asset allocation percentages for TW Pension 100, 2009 – 2014
Towers Watson Insider - Figure 6. Average target asset allocation percentages for TW Pension 100, 2009 – 2014

Source: Towers Watson

Of the 94 companies that reported target asset allocation strategies for 2013 and 2014, 16 reduced their target equity allocations by five percentage points or more. Among this group, the average change was a 15-percentage-point reduction. On the other hand, six sponsors upped their exposure to equity by five percentage points or more, although the average increase was only seven percentage points.

For 2014, 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, indicating that the largest TW Pension 100 plans hold more fixed-income and alternative investments.

Investment returns were moderately positive

During 2013, market returns outperformed expectations at the beginning of the year for most plan sponsors. At year-end 2013, aggregate (weighted by plan assets) and average investment returns were 9.8% and 10.8%, respectively (Figure 7). The different average and aggregate results were due to larger plans holding more fixed-income assets, as discussed earlier.

Bond market returns were very poor in 2013, while public equity returns were quite strong, thus giving the investment advantage to plans with large allocations in stocks. During 2013, the average return was 7.6% for sponsors with less than 50% of assets in public equities compared with 15.1% among those whose equity share was more than 50%. Our next Insider analysis will examine how various investment strategies affected plan funding and contributions through the historical period of our TW Pension 100 analysis. While a concentration of fixed-income instruments might not have been optimal for 2013, a liability-driven investment strategy can result in higher returns and lower contributions over a longer period.

Figure 7. Investment returns for TW Pension 100, 2008 – 2013
Towers Watson Insider - Figure 7. Investment returns for TW Pension 100, 2008 – 2013

Source: Towers Watson

Employer contributions lowest since 2008

Companies continued to contribute relatively large amounts to their plans during 2013, albeit at much lower levels than in prior years (Figure 8). The 2012 Moving Ahead for Progress in the 21st Century Act (MAP-21) allowed sponsors to significantly reduce minimum required contributions starting with the 2012 plan year. Many sponsors appear to have opted for the relief for 2013, as contributions dropped to their lowest level in five years. Since 2008, the TW Pension 100 have contributed more than $200 billion to their plans.

For 2013, plan sponsors contributed $27.8 billion, down from $45.2 billion in 2012. After many years of making large contributions, some sponsors took contribution holidays or decided to scale back for 2013. For example, six of the 10 largest cash contributors pumped $11.3 billion into their plans in 2012 but contributed $0.8 billion in 2013. In 2012, the median ratio of contributions to total service cost was 2.4 for the TW Pension 100, meaning companies were contributing more than twice the amount of 2012 benefit accruals. In 2013, this median ratio was only 1.6 (still well ahead of what is needed to keep pace with benefit accruals).

Figure 8. Plan contributions from TW Pension 100 ($ billions), 2008 – 2013
Towers Watson Insider - Figure 8. Plan contributions from TW Pension 100 ($ billions), 2008 – 2013

Source: Towers Watson

Conclusion

During 2013, rising interest rates reduced liabilities, while moderately positive market returns and significant plan contributions gave plan assets a boost, which pushed pension funding much higher for corporate pension plan sponsors. Aggregate funded status for the TW Pension 100 increased by 12 percentage points — from 77% to 89% — reaching the highest level since 2007. The funding improvement is good news for plan sponsors. Stronger pension fund balance sheets will reduce required cash contributions in the near future, and lower pension cost will reduce the charge against profits for 2014, thereby improving corporate earnings. Nevertheless, these companies still face a deficit of more than $125 billion.

As pension de-risking continues to be of great importance to many pension sponsors, it will be interesting to see how these funding improvements affect sponsors’ risk mitigation efforts in 2014. Sponsors that already have a risk reduction plan and use trigger points linked to funding levels to direct their strategy could see opportunities to take action this year.


Endnotes

1. 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 ratio of (a) to (b) determined by individual company.

2. The 2013 TW Pension 100 consists of sponsors of the 100 largest U.S. pension programs among U.S. publicly traded organizations, ranked by PBO at year-end 2012. For some companies, the allocation of disclosed PBO and assets between U.S. and non-U.S. is estimated.

4. On a global basis, aggregate funding results for these companies are similar to those for the U.S. For all pensions, domestic and foreign, total PBO decreased from $1.61 trillion to $1.47 trillion during 2013. Global pension assets rose from $1.23 trillion to $1.29 trillion over the period. So as of year-end 2013 on a global basis, aggregate funded status increased from 76.7% to 87.6%.

5. 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%.