Asset allocations in defined benefit (DB) plans strongly affect overall asset performance, funded status and funded status volatility as well as the sponsor's cash cost and accounting expense over time. For participants, creditors, investors and regulators, asset allocations are central to a plan's risk exposure and long-term cost. The Financial Accounting Standards Board began requiring more detailed disclosures in 2009, and Towers Watson has been analyzing asset allocations ever since. These analyses identify asset allocation trends and patterns over time.

This fourth analysis looks at pension allocations by asset class and valuation level. To enable investors and others to assess the way fair value is measured, companies must disclose a valuation level for each major asset category:

  • 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 holding1

The analysis is performed on both an aggregate- and average-sponsor basis as well as by plan size, funded status and the ratio of pension assets to corporate assets. Additionally, we compare asset holdings from 2009 through 2012 for a consistent sample of sponsors. Finally, we examine the prevalence and amount of pension assets invested in company securities.

2012 asset allocations

Towers Watson's analysis of 2012 asset allocations takes a detailed look at 556 Fortune 1000 U.S. pension plan sponsors' disclosures. Figure 1 summarizes aggregate asset allocations weighted by plan size (i.e., plan assets). As of year-end 2012, these companies held more than $1.7 trillion in pension assets, composed of cash, public equity, debt, real estate, private equity, hedge funds (alternative investments) and other.

Among these sponsors, the total allocation to equity was 40.3%, and the total allocation to debt was 40.2%. Private equity and hedge funds held 5.1% and 4.4% of assets, respectively. Of the asset valuations, 55.7% was done at Level 2 and 31.6% was done at Level 1. At 12.7%, however, Level 3 valuations were also significant, often used for private equity, hedge funds and real estate.

Figure 1. Aggregate distribution of pension assets by class and level at year-end 2012

Figure 2 depicts average asset allocations (not weighted by plan assets) for the same companies. The average Fortune 1000 pension plan sponsor in the analysis held around $3 billion in pension assets at fiscal year-end 2012. There are some differences between the average and aggregate results shown in Figures 1 and 2. The average pension allocation to equity was 47.3%, while the aggregate allocation was 40.3% — larger plans were less likely than smaller plans to hold public equity. Average allocations to debt, real estate, private equity and hedge funds were smaller than aggregate allocations. On average, less asset valuation was done at Level 3 — only 7.2% — and more at Level 1 — 37.8%.

Figure 2. Average distribution of pension assets by class and level at year-end 2012

Asset allocations by plan size

Figures 3a and 3b show aggregate and average asset allocations for small, medium and large plans (as defined by the plan asset thresholds of three groups with the same number of companies). Small plans held less than $407 million in pension assets, medium plans held between $407 million and $1.7 billion, and large plans held more than $1.7 billion (the largest plan had assets worth $92 billion).

Figures 3a and 3b. Aggregate and average asset allocations by plan size at year-end 2012

Equity allocations declined as plan size increased and averaged 43.8% for the largest plans versus 50.3% for the smallest. This confirms the results shown in Figures 1 and 2, where public equity holdings were lower when the results were weighted by plan size. While larger plans allocated less to public equities, they allocated more than small and midsize plans to other return-seeking investments, such as real estate, private equity and hedge funds.

When weighting the small, medium and large plan groups by plan assets (Figure 3a) — which puts an even greater emphasis on very large plans' asset holdings2 — differences in investing behavior between small and very large plans become even more pronounced. These very large plans now hold less public equity and more fixed income (cash + debt) and other return-seeking assets compared with the smaller plans.

Asset allocations by funded status

Figure 4 groups plans by funded status:3 less than 70%, 70% to 79%, 80% to 89% and 90% or above. Plans that were less than 70% funded were relatively more aggressive investors, generally allocating more to public equities and less to debt. Plans whose funded status exceeded 90% invested somewhat more conservatively, allocating more than any other group to debt.

Figure 4. Average asset allocations by plan funded status at year-end 2012

Only 5% of these plan sponsors explicitly stated in their annual disclosure that their future target allocations will depend on the plan's funded status, which is often called a glide path strategy. Such a strategy reduces funding volatility by shifting assets from equities to debt as funding levels improve, thereby safeguarding gains by reducing risk, albeit lessening opportunity as well. Despite the small number of sponsors whose annual reports specified a glide path (such disclosures are not required), this approach is becoming more widespread in pension investing. According to a recent Towers Watson survey on pension risk,4 37% of DB plan sponsors implemented a glide path for their pension asset mix before 2013, and an additional 24% plan to have one in place by 2015.

Equity and alternative investment allocations by ratio of pension assets to corporate assets

Figure 5 examines equity distributions by the ratio of pension plan assets to total corporate assets. Among sponsors whose plan assets were less than 20% of corporate assets, equity distributions were roughly similar. However, in plans where pension assets were 20%, 30% or more of corporate assets, allocations to equities declined. Over recent years, many plan sponsors have been trying harder to reduce pension risk, so it makes sense that sponsors with a higher pension-assets-to-corporate-assets ratio are allocating less to equity. At the other end of the spectrum, sponsors of smaller pensions relative to company assets might be willing to take on more pension risk/opportunity.

Figure 5. Equity distributions by ratio of pension assets to corporate assets, 2012

Asset allocations 2009 – 2012

The 2009 – 2012 asset allocation studies include a consistent sample of 338 companies. Figures 6a and 6b show asset allocations for these companies on an aggregate and average basis over those four years. From 2009 to 2010, overall asset allocations were relatively stable, but between 2010 and 2011 — a period of poor stock market performance — average allocations to equity dropped from 51.4% to 46.7%, while average allocations to debt rose from 35.0% to 38.7%. There was little change in overall asset allocations between 2011 and 2012.

Figure 6a. Aggregate distributions of pension assets by class and level for consistent sample, 2009 – 2012

Figure 6b. Average distributions of pension assets by class and level for consistent sample, 2009 – 2012

Pension assets held in company securities

In 2012, 11% of DB plan sponsors held pension assets directly in the form of company securities, down from 13% of sponsors in our 2011 analysis. Among these companies, such allocations averaged 4.0% of pension assets, dropping to 2.2% when weighted by end-of-year assets. The weighted average is lower than the simple average because larger plans allocated lower percentages to company securities than smaller plans.

Of the 63 sponsors that held company securities, only two explicitly mentioned contributing company securities for plan year 2012. This investing/funding behavior has seemed to slow over recent years. According to a recent Towers Watson survey on pension risk,5 only 1% of survey respondents plan to contribute company stock to their pension plan by 2015.

In most of the plans in this analysis, employer securities made up less than 4% of assets for 2012 (Figure 7). Company securities were more than 10% of plan assets in only a handful of companies, and those cases likely reflect fluctuations in asset value, rather than higher allocations to employer securities.6 In this analysis, the highest percentage of company securities as a share of plan assets was roughly 13%.

Figure 7. Allocations of company stock with positive holdings in 2012


Pension asset patterns remained fairly constant from 2011 to 2012, possibly because strong returns in the stock market during 2012 drove up equity holdings ever so slightly. Over the last few years, sponsors have been moving out of equity and into other investments to reduce risk. While pension plan de-risking has become increasingly important to plan sponsors, the trend toward more conservative asset allocations is most pronounced among sponsors of relatively well-funded plans. Among companies with high ratios of pension assets to total corporate assets, we continue to see a wider distribution, with overall lower holdings in equities, increases in debt and greater diversification.

As was true for 2011, most DB plan sponsors did not hold company securities as pension assets at year-end 2012.

Equity allocations have declined significantly over time. Stricter and more market-sensitive accounting and funding requirements — as well as investment losses during the financial crisis — have likely encouraged sponsors to better hedge their pension liabilities.


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

2. For the largest plans ($1.8B – $92B), when looking at plan asset size in deciles, the 10th decile (or 18 largest plans) represents 39% of all plan assets in this study and 44% of assets among the largest group of DB plan sponsors.

3. Funded status is the ratio of the fair value of assets over plan liabilities at year-end.

4. See "U.S. Pension Risk Management — What Comes Next," Towers Watson, November 2013.

5. See "U.S. Pension Risk Management — What Comes Next," Towers Watson, November 2013.

6. To promote asset diversification, the Employee Retirement Income Security Act does not allow U.S. DB plans to invest more than 10% of their assets in company securities. AT&T recently proposed an exemption to this limit. The proposed exemption is subject to review and approval by the Department of Labor, which is currently accepting comments from interested parties. For further information, see Federal Register, Vol. 78, No. 174, September 9, 2013.