Asset allocations in defined benefit (DB) plans strongly affect overall investment returns, the plan’s funded status and funding volatility, as well as the sponsor’s cash cost and accounting expense over time, and thus are of interest to participants, creditors, investors and regulators. The Financial Accounting Standards Board began requiring more detailed pension disclosures in 2009, and Willis Towers Watson has been tracking asset allocation trends and patterns over time ever since.1 This seventh edition looks at fiscal year-end 2015 pension allocations by asset class, such as cash, equity, debt and alternatives, as well as by various plan and asset characteristics.

The analysis is performed on both an aggregate- and average-sponsor basis as well as by plan sponsor size, plan status (open, frozen or closed) and funded status. We compare asset holdings from 2009 through 2015 for a consistent sample of sponsors. Finally, we examine the prevalence and amount of pension assets invested in company securities.

Analysis highlights

  • On average, sponsors of frozen pensions invested almost half their assets (48%) in more conservative, lower-variance investments, such as cash and debt instruments, whereas sponsors of plans where workers were still accruing benefits (open and closed plans) took on riskier investments. This is largely unchanged from last year’s allocation.
  • The overall funded status of these sponsors’ DB plans was 80% at the end of fiscal year 2015 (unchanged from the prior year). Although higher interest rates reduced plan obligations, poor financial market performances also suppressed asset growth.
  • Looking at a consistent sample of companies, changes to average equity and debt holdings were minor over the last year. Since 2009 though, average equity holdings declined by eight percentage points, while allocations to debt increased by the same amount.
  • In 2015, less than 10% of Fortune 1000 DB plan sponsors held pension assets in the form of company securities, and more than half of those held less than 4% of pension assets in such securities.

2015 pension asset allocations

Willis Towers Watson’s analysis of 2015 fiscal year-end asset allocations takes a detailed look at 513 Fortune 1000 plan sponsors’ pension disclosures.2

To enable investors and others to assess the way fair value is measured, companies must disclose a valuation level for each major pension asset category, as described below

  • Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities (typical for Treasury securities and the common stock of large U.S. companies)
  • Level 2: Unadjusted quoted prices for similar assets in active or inactive markets, or other observable inputs (common for corporate debt)
  • Level 3: Unobservable inputs supported by little or no market activity, such as an expert appraisal of a real estate holding.3

Figure 1a summarizes aggregate asset allocations weighted by plan sponsor size (as measured by the value of total pension assets) and shows total-dollar allocations for all Fortune 1000 pensions in the analysis. As of year-end 2015, these companies held more than $1.7 trillion in pension assets, composed of cash, public equity, debt and alternative investments (real estate, private equity, hedge funds and other).

Figure 1a. Aggregate asset distribution by class and level, 2015 ($ thousands)

Figure 1a. Aggregate asset distribution by class and level, 2015 ($ thousands)

*Cash includes cash equivalents and money market instruments.
**Debt includes insurance instruments.
***Hedge fund assets include derivatives and interest rate swaps.
† Value is less than 0.1%.
N = 513
Source: Willis Towers Watson

At year-end 2015, pension assets were allocated as follows: 37.3% to public equity and 43.0% to debt, with the remaining assets spread among the other categories. More than half the asset valuations (55.5%) were classified as Level 2, and 29.6% were classified as Level 1. Level 3 valuations are typically used for private equity, hedge funds and real estate.

Figure 1b depicts average asset allocations (not weighted by plan sponsor assets) for the same companies. The average Fortune 1000 pension plan sponsor in the analysis held roughly $3.3 billion in pension assets at year-end 2015.

Figure 1b. Average asset distribution by class and level, 2015 ($ thousands)

Figure 1b. Average asset distribution by class and level, 2015 ($ thousands)

Click image to enlarge.

*Cash includes cash equivalents and money market instruments.
**Debt includes insurance instruments.
***Hedge fund assets include derivatives and interest rate swaps.
† Value is less than 0.1%.
N = 513
Source: Willis Towers Watson

The average allocation to public equity was 43.7%, while the aggregate allocation was 37.3%. As for alternative assets — real estate, private equity, hedge funds and other investments — average allocations were 10.3%, while aggregate allocations were 16.5%. The difference between the aggregate and the average reflects differences in plan sponsor size — larger sponsors were more likely than smaller ones to invest in alternatives and less likely to invest in public equity.

On average, more than half the asset valuations were classified as Level 2 (57.3%), 34.1% were classified as Level 1 and only 8.6% as Level 3.

Asset allocations by plan sponsor size

Aggregate and average asset allocations for small, medium and large plan sponsors are shown in Figures 2a and 2b. The analysis divides these sponsors into three equal groups (171 funds) by total pension assets: Small plan sponsors held less than $480 million, midsize plan sponsors held between $480 million and $1.92 billion, and large sponsors held more than $1.92 billion. The largest sponsor held pension assets worth more than $87 billion. Weighting small, medium and large sponsors by plan assets emphasizes the large share of pension assets held by very large sponsors,4 as well as the pronounced differences in investing behavior between small and very large plan sponsors (Figure 2a).

Figure 2a. Aggregate asset allocations by plan sponsor size, 2015

Figure 2a. Aggregate asset allocations by plan sponsor size, 2015

Figure 2b. Average asset allocations by plan sponsor size, 2015

Figure 2b. Average asset allocations by plan sponsor size, 2015

*Cash includes cash equivalents and money market instruments.
**Debt includes insurance contracts.
***Hedge fund assets include derivatives and interest rate swaps.
Source: Willis Towers Watson

The larger the plan sponsor, the lower the allocation to public equity, which averaged 41% for the largest sponsors versus 46% for the smallest. This difference is even more striking for aggregate allocations, which is consistent with Figures 1 and 2, where the results show lower public equity holdings when assets were weighted by plan sponsor size. While larger plan sponsors allocated less to public equities, their allocations to other return-seeking investments (real estate, private equity and hedge funds) were more than four times those of small plan sponsors.

Asset allocations by plan status

For this part of the analysis, we divided plan sponsors into three mutually exclusive categories by the status of their primary pension plan: closed, frozen or open. Seventy-four percent of the companies in our analysis sponsored either a closed or frozen pension plan, while 26% maintained open plans.

Figures 3a and 3b show asset allocations by plan status and demonstrate a relationship between plan status and investment risk, with the correlation strongest on an aggregate basis (Figure 3a). Sponsors of frozen plans invested more than half their assets in more conservative, stable investments (relative to equities), such as cash and debt, whereas sponsors of open and closed plans (where some or all workers continue to accrue benefits) favored riskier investments. Sponsors of closed plans were inclined to take on more alternative investments compared to those with open plans, which maintained larger equity positions.

Figure 3a. Aggregate asset allocations by plan status, 2015

Figure 3a. Aggregate asset allocations by plan status, 2015

Figure 3b. Average asset allocations by plan status, 2015

Figure 3b. Average asset allocations by plan status, 2015

*Cash includes cash equivalents and money market instruments.
**Debt includes insurance contracts.
***Hedge fund assets include derivatives and interest rate swaps.
Source: Willis Towers Watson

Asset allocations by funded status

From 2009 through 2012, pension funding remained relatively stable, with funded status typically averaging between 75% and 80%.5 In 2013, interest rates rose for the first time in years, which reduced liabilities. By year-end 2013, higher interest rates, very strong equity returns and substantial cash contributions had boosted funding levels to an average 87%. Over 2014, however, lower interest rates and the widespread adoption of new mortality tables with longer life expectancies drove the average funded status back down to 80%, and the number of sponsors with fully funded plans declined from 14% to 6%. By year-end 2015, higher interest rates had brought down liabilities, but the value of plan assets had dropped as well, thus keeping funding levels roughly where they were at year-end 2014.

Our 2015 analysis shows a correlation between funded status and asset allocation (Figure 4a). Sponsors of pensions whose funded status was between 80% and 99% held less in public equities and more in debt than their less well-funded counterparts (although this was not true where funded status was 100% or higher). This result aligns with the de-risking strategies, such as liability-driven investing (LDI) or asset glide paths,6 now operating in some pension funds.

Figure 4a. Average asset allocations by funded status, 2015

Figure 4a. Average asset allocations by funded status, 2015

Click image to enlarge.

Figure 4b. Average asset allocations by change in funded status, 2015

Figure 4b. Average asset allocations by change in funded status, 2015

Click image to enlarge.

*Cash includes cash equivalents and money market instruments.
**Debt includes insurance contracts.
***Hedge fund assets include derivatives and interest rate swaps.
Source: Willis Towers Watson

Unlike in past years, asset allocations did not play a significant role in changes to funded status from 2014 to 2015 (Figure 4b), as both equity and bond returns were weak over 2015 (Figure 5). Most of the growth in plan assets was due to sponsors’ contributions.7

Figure 5. Investment returns, 2009 – 2015

Figure 5. Investment returns, 2009 – 2015

Click image to enlarge.

*The Standard and Poor’s 500 Index is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.
**The Russell 2500 Index is a subset of the Russell 3000® Index. It includes approximately 2,500 of the smallest securities based on a combination of their market cap and current index membership.
***The MSCI EAFE Index measures the equity market performance of developed markets outside the U.S. and Canada.
Source: Bloomberg

Pension assets held in company securities

Almost 9% of these DB plan sponsors held company securities in 2015, declining slightly from 10% in 2014. These allocations averaged 5.5% of pension assets in 2015, dropping to 2.4% when weighted by end-of-year asset values. The weighted average is lower than the simple average because larger plan sponsors allocated less to company securities than smaller ones.

Only one of the 45 sponsors that held company securities explicitly noted plan contributions in the form of company securities in 2015.

For more than half these plan sponsors (53%), employer securities accounted for 4% or less of pension assets in 2015 (Figure 6). Company securities were more than 10% of plan assets in only a handful of companies, and those instances reflect the effect of higher relative returns rather than of higher allocations to employer securities.8

Figure 6. Allocations of company stock with positive holdings, 2015 (percentage of companies)

Figure 6. Allocations of company stock with positive holdings, 2015 (percentage of companies)

Click image to enlarge.

N = 45
Source: Willis Towers Watson

Seven-year asset allocations

The 2009 to 2015 asset allocation results are based on a consistent sample of companies that have been in the Fortune 1000 over the last seven years. Figures 7a and 7b show asset allocations for these companies on an aggregate and average basis from 2009 through 2015.

Figure 7a. Aggregate asset allocations for consistent sample of 274 Fortune 1000 companies, 2009 – 2015 ($ thousands)

Figure 7a. Aggregate asset allocations for consistent sample of 274 Fortune 1000 companies, 2009 – 2015 ($ thousands)

Click image to enlarge.

Figure 7b. Average asset allocations for consistent sample of 274 Fortune 1000 companies, 2009 – 2015 ($ thousands)

Figure 7b. Average asset allocations for consistent sample of 274 Fortune 1000 companies, 2009 – 2015 ($ thousands)

Click image to enlarge.

*Cash includes cash equivalents and money market instruments.
**Debt includes insurance contracts.
***Hedge fund assets include derivatives and interest rate swaps.
†Values are less than 0.01%.
Source: Willis Towers Watson

From 2014 to 2015, there were minor movements in asset allocations. On an aggregate basis, public equity holdings declined by 1.0 percentage points and debt holdings increased by 0.1 percentage points.

Over the last seven years, the shift from equity toward fixed-income investments has been both gradual and consistent. The only exception was in 2013, when strong equity performance inflated allocations to equities and reduced debt holdings slightly. Since 2009, average allocations to public equities declined by more than eight percentage points, while allocations to debt increased by roughly the same amount.

Over 2015, equity holdings declined for 52% of these pension sponsors and increased for 47% (Figure 8). In most cases (roughly four out of five companies), the changes were relatively minor — between –4.9% and +4.9%. These fluctuations were most likely the result of a failure to rebalance asset allocations at year-end rather than of changes to target allocation policies (target policies did not change significantly over the year). Equity allocations changed by more than 10 percentage points for only 7% of sponsors: Almost 4% of these sponsors reduced their equity holdings (the average decrease was 14.6%), while roughly 3% increased them (the average increase was 16.2%).

Figure 8. Average changes in equity and debt allocations in 2015

Figure 8. Average changes in equity and debt allocations in 2015

Click image to enlarge.

Source: Willis Towers Watson

Conclusion

The changes to asset allocations among Fortune 1000 pension sponsors from 2014 to 2015 were relatively minor. As in previous years, larger plan sponsors continued to hold less equity and more diversified allocations than smaller ones. Larger plan sponsors also held more in alternative return-seeking assets compared with small sponsors (14.9% versus 6.8%). This could be because plans sponsored by larger companies are overseen by pension board members and in-house managers with greater expertise, enabling them to actively manage an alternative assets portfolio. Moreover, better access to opportunities and negotiating power on fees enables larger companies to more easily hold highly diversified portfolios.

In terms of plan status, sponsors of frozen plans tend to avoid long-term or less predictable assets as a way to better manage their plans. Thus, sponsors of frozen plans held more fixed-income assets, on average, compared with sponsors of closed or open plans.

Since 2009, plan sponsors have been steadily shifting allocations away from public equities into debt holdings. There has also been a slow and persistent increase in allocations to real estate, private equity and other alternative assets, rising from 7.2% in 2009 to 11.4% in 2015. Given volatile market conditions, adopting or maintaining an effective de-risking strategy could be more important than ever for pension plan funding.


Endnotes

1. See “2014 Asset Allocations in Fortune 1000 Pension Plans,” Willis Towers Watson Insider, October 2015.

2. The analysis consists of Fortune 1000 DB sponsors that provided comprehensive asset allocation disclosures in their annual reports and also managed assets for domestic pensions.

3. For Level 3 assets, a reconciliation of the beginning and ending balances is also required, reflecting the actual return on sponsors’ assets, purchases, sales and settlements.

4. As measured by sponsor asset size in deciles, the 17 largest plan sponsors held 38% of all plan assets and 44% of assets held by the largest sponsors (those with more than $1.92 billion in assets).

5. Funded status is defined as the ratio of the fair value of assets to projected benefit obligations at year-end.

6. LDI strategies typically use fixed-income assets as a hedge against interest-rate-driven movements in plan liabilities. In years when long-term, high-quality corporate bond interest rates decline, with corresponding increases in obligations, corporate bonds will produce positive returns and vice versa. In a glide path strategy, future target allocations are based on the plan’s funded status, with the sponsor shifting assets from equities to debt as funding levels climb to mitigate risk and volatility.

8. To promote asset diversification, pension law does not allow U.S. DB plan sponsors to invest more than 10% of assets in company securities.