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WTW Pension 100: Year-end 2018 disclosures of funding, discount rates, asset allocations and contributions

Investments|Retirement
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By Brendan McFarland | May 23, 2019

This analysis examines funding results, the discount rates used to measure liabilities, target asset allocation policies, investment returns and plan contributions.

Despite a sharp stock market decline in the final quarter of 2018, the aggregate funded status1 of defined benefit (DB) plans in the Willis Towers Watson Pension 1002,3 managed to rise slightly, from 85.1% in 2017 to 86.0% in 2018. While poor investment returns depressed plan assets, higher interest rates and sizable plan contributions more than offset the decline, at least on an aggregate level. On an average basis, however, funded status declined, and most companies recognized a funding loss for 2018.

This annual analysis is based on just-reported pension disclosures from the Securities and Exchange Commission (SEC) 10-K filings of 100 publicly traded U.S. sponsors of large pension plans whose fiscal years end in December.4 We examine reported funding results, the discount rates used to measure liabilities, target asset allocation policies over time, investment returns and plan contributions. Where applicable, historical values are shown for companies in the current WTW Pension 100.

Among these WTW Pension 100 plans, the gap between liabilities and assets has widened substantially over the last 12 years. Between 2007 and 2012, funding dropped from an $80 billion surplus to a $293 billion deficit — the largest deficit in our analysis (Figure 1). The following year, higher interest rates reduced plan liabilities — reversing a four-year trend — and assets grew, slicing the prior year’s deficit in half. By year-end 2014, however, interest rate declines combined with the widespread adoption of longer life expectancy assumptions pushed aggregate pension deficits back up to $246 billion. In 2015, when higher interest rates drove liabilities down, returns were poor, while in 2016, returns were good but interest rates dropped back down. Both years ended without much change to funded status.

By year-end 2017, interest rates had dropped again, but investment returns were well over expectations and contributions were the highest since 2008. Assets grew by more than plan obligations, materially reducing the deficit for the first time in four years.

Over 2018, both plan obligations and assets declined. Although interest rates ticked back up, investment returns were the worst since 2008. Thanks to another year of large aggregate pension contributions, however, liabilities fell by slightly more than assets.

Aggregate funded status ticks up slightly for 2018, while average funded status declined.

Among WTW Pension 100 companies in 2018, plan obligations declined by 8% and plan assets dropped by 7%. The overall funding deficit decreased by roughly $27 billion — from $200 billion to $173 billion — a 14% reduction. The deficit dropped by $120 billion between its 2012 peak and 2018. Among these same companies, aggregate funded status climbed to 86.0% in 2018, up from 85.1% in 2017 (Figure 2). While aggregate funded status increased over the year, average funded status declined from 86.7% to 86.4%.

Figure 3 shows the distribution of funded status since 2007, reflecting some major shifts over the analysis period and a more minor shift from 2017 to 2018. The number of companies whose funded status was over 90% dropped from 41 in 2017 to 37 in 2018. At the other end of the spectrum, funding levels were below 70% for only eight companies in 2018 compared with 10 companies in 2017. Companies whose pensions were less well funded at year-end 2017 made significant contributions in 2018, while those that were well funded in 2017 seemed to scale back their 2018 contributions (explained later).

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
100% or more 49% 4% 7% 8% 6% 5% 21% 6% 6% 7% 13% 11%
90% – 99% 27% 11% 10% 17% 8% 10% 23% 18% 14% 14% 28% 26%
80% – 89% 17% 19% 31% 36% 26% 23% 36% 31% 35% 33% 27% 32%
70% – 79% 6% 27% 33% 29% 31% 34% 16% 35% 33% 30% 22% 23%
Under 70% 1% 39% 19% 10% 29% 28% 4% 10% 12% 16% 10% 8%
Figure 3. Distribution of funded status for WTW Pension 100, 2007 – 2018

Source: Willis Towers Watson

Figure 4 shows changes in funded status from 2017 to 2018. As noted earlier, while aggregate funded status improved, average funding levels declined. On a company basis, funded status improved for 44 sponsors and declined for 56. The funding increases were between 0.1 and 4.9 percentage points for 34 companies and were five percentage points or more for another 10 companies (owing to relatively large plan contributions explained later in this analysis). Funded status fell between 0.1 and 4.9 percentage points in 47 companies and dropped by more than five percentage points in nine companies.

Magnitude of change in funded status Number of companies Average change in funded status for companies in column two
5.0% or more 10 8.7%
0.0% to 4.9% 34 1.7%
–0.1% to –4.9% 47 –2.3%
–5.0% or less 9 –7.5%
Total 100 –0.3%
Figure 4. Changes in funded status for WTW Pension 100, 2017 – 2018

Source: Willis Towers Watson

Discount rates increased during 2018

Plan obligations declined in 2018, mostly due to an increase in the discount rates used to measure pension liabilities. From 2008 through 2012, discount rates fell every year — an accumulated decline of 235 basis points — before finally rising in 2013 (Figure 5). Interest rates fluctuated over the next couple of years but then fell in both 2016 and 2017. Over 2018, average rates increased by 63 basis points to 4.26%.

Shift to more conservative investments resumes

Over the past decade, there has been a gradual aggregate shift from public equities to fixed-income and alternative assets, reflecting growing interest in managing plan liabilities by reducing investment risk (Figure 6). Since 2009, the average target allocation to public equites declined by almost 17 percentage points, while target allocations to fixed-income investments rose by around 14 percentage points.

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2019(aggregate) Percentage point change (2009 – 2019)
Public equity 54.5% 52.2% 50.4% 46.8% 46.0% 43.5% 43.0% 42.6% 42.1% 40.6% 37.6% 34.3% –16.9
Fixed income 34.0% 34.6% 35.7% 38.7% 39.3% 41.8% 42.4% 42.9% 43.1% 45.1% 48.2% 48.0% +14.2
Cash 0.4% 0.9% 1.1% 1.0% 1.0% 1.1% 1.1% 1.0% 1.1% 1.1% 1.2% 1.2% +0.8
Real estate 3.4% 3.4% 3.1% 3.0% 3.1% 3.0% 3.2% 3.3% 3.4% 3.2% 3.1% 4.5% –0.3
Other 7.7% 8.9% 9.7% 10.5% 10.6% 10.6% 10.3% 10.2% 10.3% 10.0% 9.9% 12.0% +2.2
Figure 6. Average target asset allocation percentages for WTW Pension 100, 2009 – 2019

Source: Willis Towers Watson

The substantial shifts to fixed-income investments between 2009 and 2014 slowed during the next few years but then picked up again in 2018 and 2019. On average, fixed-income holdings ticked up by 2% in 2018 and by 3% in 2019.

Out of the 92 companies that reported target asset allocation strategies for 2018 and 2019, 22 reduced their target equity allocation by five percentage points or more, with an average reduction of 12 percentage points. On average, these 22 companies had higher funding levels than our overall sample (91.2% versus 86.4%).

These recent reallocations to fixed income could reflect higher funding levels triggering or accelerating de-risking strategies, such as glide paths, which reduce equity exposure as the plan moves closer to full funding. Only three sponsors increased their equity exposure by five percentage points or more, with an average increase of seven percentage points.

Similar to past studies, aggregate results (weighted by plan assets) differ from average results for 2018, which suggests that allocations vary by plan size. On an aggregate level, sponsors hold less public equity and more real estate/other alternative investments, indicating the largest plans in this analysis have more alternative investments than the smallest.

Sponsors realized negative investment returns over 2018

Through the third quarter of 2018, both domestic stock returns and interest rates were up. Had those conditions continued, pension sponsors would have enjoyed another year of substantially higher funding levels. Unfortunately, by the end of 2018, equity market losses ranged from –4% to –14%, and returns for corporate long bonds — used in liability-driven investment (LDI) strategies — were roughly –7% (see Figure 7), which offset the interest rate increase (also based on high-quality corporate bonds).

In 2018, WTW Pension 100 investment returns averaged –4.5% (aggregate returns were –4.1%), well below expectations of almost 7% and the second lowest investment returns since 2008 (Figure 8).

Averaged over the past three years, annualized returns for WTW Pension 100 sponsors were 5.5%, underperforming expectations of roughly 7%. Since 2008, annualized investment returns have averaged only 5.3% — again under expectations — largely due to significant losses in the 2008 financial crisis and lesser losses in 2018. Returns averaged 8.2% over the post-financial-crisis 10-year period between 2009 and 2018. On average, these plan sponsors’ returns outperformed expectations in seven of the past 11 years.

Another year of large contributions for plan sponsors

WTW Pension 100 companies contributed $45.5 billion for the 2018 plan year — down 11% from 2017 but still the second largest contributions since 2008 (Figure 9). Aggregate 2018 contributions were even larger than those before funding relief was enacted in 2012 and later, which significantly reduced required minimum contributions. Since 2008, sponsors in this analysis have contributed roughly $377 billion to their pension plans.

Aggregate contributions were almost 2.5 times aggregate service cost,5 which was $18.5 billion in 2018.

Only around one-third of sponsors contributed more in 2018 than in 2017 (Figure 10). Higher aggregate contributions in both 2017 and 2018 were mostly due to higher-than-expected contributions from a handful of large plan sponsors, typically in response to rising Pension Benefit Guaranty Corporation premiums, the attractiveness of borrowing to fund pensions, growing interest in de-risking strategies and a desire to prefund future contributions. The Tax Cuts and Jobs Act reduced federal corporate tax rates starting in 2018 and, as a result, increased the relative value of the pension tax deduction for earlier tax years.6 Ten companies contributed more than $1 billion last year for a total of $14.0 billion in 2017 and $30.0 billion in 2018.7

Number of companies Aggregate contributions in 2017 Aggregate contributions in 2018
Larger contribution in 2018 35 $7.8 $33.3
Same level of contributions in 2017 and 2018 3 $0.2 $0.2
Smaller contribution in 2018 62 $42.9 $12.0
Figure 10. Plan contributions ($ billions) from WTW Pension 100, 2017 versus 2018

Note: Two of the three plan sponsors that contributed the same amounts in 2017 and 2018 made no contribution in either year.
Source: Willis Towers Watson

As noted earlier, most companies whose funded status increased substantially during 2018 made large plan contributions. Among companies whose funding levels rose by more than five percentage points, the average ratio of plan contributions to plan assets was 10%, compared with 4% for the entire WTW Pension 100 and 2% for the 56 companies whose pension funding declined in 2018. Companies that made larger contributions also started the year with lower-than-average funding levels. Among the 10 companies that contributed more than $30 billion for 2018, year-end 2017 funded status averaged 75% compared with the overall average of roughly 87% for the WTW Pension 100. By year-end 2018, average funded status for these 10 companies had risen to 81%.

Slow and steady decline of plan obligations continues

Pension obligations (before settlements and changes in assumptions, such as interest rates and mortality improvements) have been declining for some time, as the benefits paid out of these plans now exceed service and interest costs, which push the PBO higher. In 2018, for example, the WTW Pension 100 paid out $78.6 billion in retirement benefits, while service and interest costs totaled $63.8 billion. This development results partly from pension freezes and closes over the past decade, which reduce service cost over time. In addition, sponsors are increasingly turning to de-risking strategies such as bulk lump sum offerings and annuity purchases, which also reduce the PBO.

Conclusion

Through the third quarter of 2018, interest rates were higher and equity markets were relatively stable, putting pension plans on track for another year of improved funding. However, the steep equity market decline in the fourth quarter, particularly in December, brought down average funding levels, and most sponsors ended the year with minor declines in funded status. Aggregate funded status ticked up slightly due to sizable contributions from a minority of plan sponsors.

Over the first three months of 2019, equity and bond returns rallied. However, interest rates have fallen by 39 basis points, potentially driving up plan obligations. Market volatility in 2018 and the resulting seesaw in funded status show why plan sponsors need to periodically review their overall pension management strategy. To reduce the risk of market volatility, employers can consider risk management strategies, such as revisiting their investment approach or transferring plan obligations via annuity purchases or lump sum buyouts.


Endnotes

1. The aggregate funded status is the ratio of (a) the sum of all assets to (b) the sum of all projected benefit obligations (PBO) for the 100 companies. Average funded status is calculated by averaging the ratio of (a) to (b) on an individual company basis.
2. The 2018 WTW 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 2017. For some companies the allocation between U.S. and non-U.S. is estimated.
3. Pension liability values in 10-Ks also reflect nonqualified plans (which are usually not shown separately). An analysis of companies that disclose their qualified and nonqualified plans separately found that funded status is typically eight percentage points higher without the nonqualified plan obligations because these plans are typically not funded.
4. See “WTW Pension 100: Year-end 2017 disclosures of funding, discount rates, asset allocations and contributions,” Willis Towers Watson Insider, May 2018.
5. Service cost refers to the present value of the projected retirement benefits earned by plan participants in the current period.
6. For most organizations, we anticipate that the tax-deduction benefit for pension contributions was higher under former tax law. Companies with calendar plan and tax years had until September 14, 2018, to contribute and thus take advantage of the larger deduction available under the higher corporate tax rates.
7. In 2018, one company reclassified a prior contribution, which was reflected as a non-cash contribution on last year’s balance sheet. This contribution represented 19% of aggregate WTW Pension 100 contributions in 2018.

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