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2018 asset allocations in Fortune 1000 pension plans

Retirement
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By Mercedes Aguirre and Brendan McFarland | March 19, 2020

The analysis looks at allocations by plan size, status and funding. It also examines the link between risk reduction and allocations, and tracks trends over time.

Up until the third quarter of 2018, plan sponsors were in a position to close out the year with improved funding levels due to tailwinds from higher discount rates and — what was until then — decent market returns. Expectations turned south in the fourth quarter when equity markets suffered significant downturns, wiping out the gains from earlier in the year. Nevertheless, the positive effect stemming from higher discount rates helped bring liabilities down, and record levels of employer pension contributions helped sponsors close the year with funding levels almost unchanged. Over the past decade, there have been various swings in funding levels, but plan sponsors have witnessed limited increases in funded status since the global financial crisis. In this context, plan sponsors continue to balance their need for de-risking strategies — both in terms of asset allocation and risk transfer activities — with their need to maintain focus on their growth portfolios in order to gain meaningful returns to cover liabilities and fund further pension risk transfers. Further, achieving fully funded levels is becoming more time-sensitive as funding relief nears an end and Pension Benefit Guaranty Corporation premiums for underfunded plans continue to rise.

The Financial Accounting Standards Board began requiring more detailed pension disclosures in 2009, and Willis Towers Watson has been analyzing asset allocations ever since.1 These analyses track asset allocation trends and patterns over time in Fortune 1000 plans. This 10th edition looks at fiscal year-end 2018 pension allocations by asset class, such as cash, equity, debt and alternatives, as well as by a variety of other attributes of both the assets and the plans.

The analysis is performed on both an aggregate-sponsor (weighted by plan assets) and average-sponsor basis as well as by plan size, plan status (open, frozen or closed) and funded status (defined as the ratio between total fair value of assets over total liabilities, considering both U.S. and non-U.S. plans). We examine the prevalence and amount of pension assets invested in company securities. Finally, we compare asset holdings from 2009 through 2018 for a consistent sample of sponsors, and examine the relationship between risk-reduction strategies and asset allocations.

Analysis highlights

  • There is a clear correlation between a pension plan’s status and its portfolio’s risk profile, with frozen plans holding more liability-hedging investments compared with closed and open plans. On average, frozen pension plans held almost 60% of their assets in fixed income and cash, versus only 49% for sponsors of open plans.
  • Despite the investment market downturn experienced during the fourth quarter, sponsors in this analysis closed the year with an average funding status of 86%, showing a minor increase from 2017 (85%). Two main factors are behind this: From an asset perspective, 2018 was a year of record contributions, while from a liability perspective, rising discount rates helped push liabilities down, counteracting the negative impact of depressing market performance.
  • Over the past nine years, the shift from equities to fixed-income investments has been consistent. Since 2009, average allocations to public equities declined by roughly 16 percentage points, while allocations to debt increased by close to the same amount. Sponsors show a gradual search for returns via low equity beta investments, with allocations to alternatives (including hedge funds, private equity and real estate) increasing from 6.6% in 2009 to 8.6% in 2018.
  • In 2018, around 8% of Fortune 1000 defined benefit (DB) plan sponsors held pension assets in the form of company securities, and among that group, such securities averaged 5.8% of plan assets.

Larger plans allocated more than twice as much as smaller plans to other return-seeking investments (14.1% versus 5.7%), which might reflect larger plans being in a better position to access alternative investment strategies that seek to provide better risk-adjusted returns.

2018 aggregate and average asset allocations

Willis Towers Watson’s analysis of 2018 fiscal year-end asset allocations takes a detailed look at 472 Fortune 1000 plan sponsors’ pension disclosures.2, 3

Figure 1a summarizes aggregate asset allocations weighted by the value of the sponsor’s plan assets and shows total-dollar allocations. As of year-end 2018, the 472 companies in this analysis held more than $1.8 trillion in pension assets, composed of cash, public equity, debt and alternative investments (real estate, private equity, hedge funds and other).

As shown in Figure 1a, at year-end 2018, 32.1% of pension assets were allocated to public equity and 49.9% were allocated to debt, with the remaining assets spread among the other various categories.

Figure 1b depicts average asset allocations (not weighted by plan assets) for the same companies. The average Fortune 1000 pension plan sponsor in the analysis held roughly $3.8 billion in assets at year-end 2018.

Figure 1a summarizes aggregate asset allocations weighted by the value of the sponsor’s plan assets and shows total-dollar allocations.
Figure 1a. Aggregate asset distribution by class and level, 2018 ($ thousands)
Figure 1b depicts average asset allocations (not weighted by plan assets) for the same companies.
Figure 1b. Average asset distribution by class and level, 2018 ($ thousands)

Notes: Cash includes cash equivalents and money market instruments; debt includes insurance contracts, and hedge fund assets include derivatives and interest rate swaps.
Source: Willis Towers Watson

The average allocation to public equity was 36.5% (versus an aggregate allocation of 32.1%), while the average debt allocation was 50.3%. As for alternative assets — real estate, private equity, hedge funds and other investments — allocations averaged 10%, while aggregate allocations were 15.1%. The difference between the aggregate and average reflects differences in plan size: Larger plans were more likely than smaller plans to invest in alternatives and less likely to invest in public equity.

Asset allocation changes over the year reflected both a continuing effort to de-risk plan assets and poor equity market performance (as well as a possible failure to rebalance portfolios). During 2018 average public equity holdings declined by roughly 6 percentage points, whereas average debt holdings increased by 5.4 percentage points. In a consistent sample of 421 plan sponsors from 2017 to 2018, equity holdings increased for only 16% of these sponsors and decreased for 83% (Figure 2).

Over 20% of plan sponsors reduced their equity share by more than 10 percentage points (with an average decrease of 20.4%), while only 3.6% increased it by more than 10 percentage points (average increase of 18.1%).

Figure 2. Average annual changes in equity and debt allocations, 2018
Change magnitude Equity allocations Debt allocations
  % of sponsors realizing a change in their equity allocations Average change realized in equity allocations % of sponsors realizing a change in their debt allocations Average change realized in debt allocations
Increase of over 10% 3.6% 18.1% 21.9% 21.3%
5% – 9.9% increase 3.3% 7.4% 13.5% 7.4%
0% – 4.9% increase 9.3% 1.9% 42.3% 2.3%
No change 1.0% 0.0% 0.5% 0%
0% – 4.9% decrease 39.6% –2.6% 13.8% –1.8%
5% – 9.9% decrease 22.1% –7.3% 3.8% –7.1%
Decrease of over 10% 21.1% –20.4% 4.2% –17.2%

Source: Willis Towers Watson

Asset allocations by plan size

Aggregate and average asset allocations for smaller, medium and larger plan sponsors are shown in Figures 3a and 3b. The analysis divides these sponsors into three equal groups by total pension assets: Smaller plan sponsors held less than $526 million, midsize plan sponsors held between $526 million and $2.0 billion, and large plan sponsors held more than $2.0 billion. The largest sponsor held pension assets worth more than $84 billion. Weighting smaller, medium and larger sponsors by plan assets emphasizes the large share of pension assets held by very large plans,4 as well as the pronounced differences in investing behavior between smaller and larger plans (Figure 3a).

Aggregate asset allocations for smaller, medium and larger plan sponsors are shown.
Figure 3a. Aggregate asset allocations by plan size, 2018
Average asset allocations for smaller, medium and larger plan sponsors are shown.
Figure 3b. Average asset allocations by plan size, 2018

Notes: Cash includes cash equivalents and money market instruments; debt includes insurance contracts, and hedge fund assets include derivatives and interest rate swaps.
Source: Willis Towers Watson

The larger the plan, the lower the allocation to public equity, which averaged 35.1% for large plans versus 39.3% for small plans. This difference is even more striking for aggregate allocations. These results are also consistent with those shown in Figures 1a and 1b, where public equity holdings were lower when assets were weighted by plan size. Overall, larger plans allocated less to public equities and more to other return-seeking investments (real estate, private equity and hedge funds). On average, larger plans allocated more than twice as much as smaller plans to other return-seeking investments (14.1% versus 5.7%), which might reflect larger plans’ access to economies of scale and in-house investment structures that enable them to effectively manage alternative assets.

Asset allocations by plan status

For this part of the analysis, we divided plan sponsors into three mutually exclusive categories by the current status of their primary pension plan: open, closed to new hires or frozen. Open DB plans are those still offered to newly hired employees, while closed plans stopped being offered to new hires after a fixed date. In frozen plans, accruals by service, pay or both have ceased for plan participants. Roughly three-quarters of the companies in our analysis sponsored either a closed or a frozen pension plan, while the remaining still offered open plans.

Figures 4a and 4b show asset allocations by plan status and demonstrate a relationship between the plan’s current status and the portfolio’s risk profile, with the correlation strongest on an aggregate basis (Figure 4a). Frozen pensions held more risk-averse investments compared with plans — either open or closed — in which workers were still actively accruing pensions. In aggregate, sponsors of frozen plans held almost 60% of their assets in fixed income and cash, versus only 46.2% for sponsors of open plans.

Figure 4a shows asset allocations by plan status and demonstrates a relationship between the plan’s current status and the portfolio’s risk profile.
Figure 4a. Aggregate asset allocations by plan status, 2018
Figure 4b shows asset allocations by plan status and demonstrates a relationship between the plan’s current status and the portfolio’s risk profile.
Figure 4b. Average asset allocations by plan status, 2018

Notes: Cash includes cash equivalents and money market instruments; debt includes insurance contracts, and hedge fund assets include derivatives and interest rate swaps.
Source: Willis Towers Watson

Asset allocations by funded status

During the beginning of the second half of 2018, plan sponsors witnessed positive market conditions materializing into significant improvements for their pension funding levels. Unfortunately, during the fourth quarter of 2018 markets took a turn for the worse, wiping out previous gains in funded status witnessed just a few months earlier. Nevertheless, sponsors of Fortune 1000 DB plans in this analysis closed the year with an average funding status of 86%, showing a minor increase in levels compared with 85% at the end of 2017. While equity markets tanked over the last quarter of 2018, two main factors kept funding levels from witnessing significant declines: 1) record employer contributions showing — in part — sponsors’ interest in reaching September’s deadline to lock in the 35% corporate tax rate deduction; and 2) rising discount rates, which helped push liabilities down.

Our 2018 analysis shows a correlation between funded status and asset allocations (Figure 5a). As sponsors get closer to full funding levels, their portfolios tend to become more conservative in nature, typically as a result of investment de-risking strategies such as liability-driven investment (LDI) and asset glide paths.5 This year, average debt holdings surpassed equity investments across all funding levels, evidencing the sponsors’ continuous efforts toward de-risking.

Figure 5a. Average asset allocations by plan funded status, 2018
Asset class Funded status
  Less than 70% 70% to 79% 80% to 89% 90% to 99% 100% or more
Cash 2.5% 3.3% 2.8% 3.3% 3.6%
Debt 43.0% 46.3% 51.0% 54.8% 56.8%
Equity 42.6% 39.3% 34.1% 32.6% 33.4%
Hedge funds 4.0% 2.6% 2.9% 2.2% 0.4%
Other 4.2% 3.6% 3.5% 2.2% 2.0%
Private equity 1.2% 1.9% 3.2% 2.3% 2.3%
Real estate 2.5% 3.0% 2.5% 2.6% 1.5%
Total % 100% 100% 100% 100% 100%
N 45 94 109 91 49

Notes: Cash includes cash equivalents and money market instruments; debt includes insurance contracts, and hedge fund assets include derivatives and interest rate swaps.
Source: Willis Towers Watson

While plans tend to become more risk averse as their funded status nears full funding, a closer look also uncovers a further link between debt allocations and benefit accruals.6 Figure 5b depicts the relationship between higher allocations to debt, and the plan’s funded status and benefit accrual rate. Well-funded plans with lower benefit accrual rates are typically associated with higher allocations to fixed-income assets, while higher accrual rates (reflecting active pensions) correspond with higher allocations to return-seeking assets.

Figure 5b. Allocations to debt by funded status and benefit accrual rates, 2018
Accrual rate Funded status
  Less than 70% 70% to 79% 80% to 89% 90% to 99% 100% or more
  N Debt % N Debt % N Debt % N Debt % N Debt %
Less than 0.5% 12 34.7% 33 51.2% 43 59.1% 38 61.1% 22 69.3%
0.5% to 0.99% 9 38.0% 14 44.0% 20 48.1% 9 58.7% 9 66.7%
1.0% to 1.9% 11 54.4% 29 46.0% 32 47.0% 31 49.8% 10 44.4%
2.0% to 2.9% 8 40.4% 20 45.5% 18 48.0% 18 45.8% 10 45.6%
3.0% or more 15 45.4% 11 41.2% 17 41.5% 11 46.8% 15 45.8%
N 55   107   130   107   66  

Source: Willis Towers Watson

Figure 5c illustrates the key role played by both asset allocation and employer contributions in plan funded status by year-end 2018. While those plans avoiding a large deterioration of their funding levels are characterized by holding more than 50% of their investments in fixed-income assets, those that contributed substantial amounts of cash to their pensions were the ones avoiding a drop in their average funding levels. Although investment returns were in the red across the board (Figure 6), those with larger equity positions coupled with relatively low contributions took the greatest hit.

Alternatives seem to have also played a role: Plans that experienced larger decreases in their funding levels held, on average, fewer alternatives. Larger alternative holdings between those experiencing gains or small drops in their funding levels can show the benefits of holding assets with low correlation to equity beta as part of the plan’s portfolio.

Figure 5c. Average asset allocations by annual change in funded status, 2018
Asset class Annual change in funded status
  More than
–5%
–5% to 0% 0% to 5% Greater than 5%
Cash 4.3% 2.6% 3.4% 3.7%
Debt 47.2% 50.3% 50.6% 51.9%
Equity 42.1% 36.1% 34.5% 35.1%
Hedge funds 1.0% 2.2% 3.2% 3.0%
Other 2.0% 3.6% 3.2% 2.1%
Private equity 1.8% 2.4% 2.6% 1.9%
Real estate 1.6% 2.8% 2.5% 2.3%
Average change in funded status –8.0% –2.0% 1.9% 12.5%
Return on investments –6.4% –5.1% –3.8% –3.4%
Employer contributions* 2.9% 2.7% 11.5% 13.2%
N 26 187 111 57

Notes: Cash includes cash equivalents and money market instruments; debt includes insurance contracts, and hedge fund assets include derivatives and interest rate swaps.
*Employer contributions are defined as contributions over year-end plan assets.
Source: Willis Towers Watson

Figure 6. Investment returns, 2009 – 2018
Year Equity index returns* Bond index returns
  S&P 500 Russell 2500 MSCI EAFE Barclays Long Treasury Barclays Long Credit Barclays Aggregate
2009 26.5% 34.4% 32.5% –12.9% 16.8% 5.9%
2010 15.1% 26.7% 8.2% 9.4% 10.7% 6.5%
2011 2.1% –2.5% –11.7% 29.9% 17.1% 7.8%
2012 16.0% 17.9% 17.9% 3.6% 12.7% 4.2%
2013 32.4% 36.8% 23.3% –12.7% –6.6% –2.0%
2014 13.7% 7.1% –4.5% 25.1% 16.4% 6.0%
2015 1.4% –2.9% –0.4% –1.2% –4.6% 0.5%
2016 11.9% 17.6% 1.5% 1.3% 10.2% 2.7%
2017 21.8% 16.8% 25.6% 8.5% 12.2% 3.5%
2018 –4.4% –10.0% –13.4% –1.9% –6.8% 0.0%

*Standard and Poor’s 500 is an American stock market index based on the market capitalizations of 500 large companies listing common stock on the New York Stock Exchange or NASDAQ. The Russell 2500 is a subset of the Russell 3000® Index, which includes roughly 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

Around 8% of Fortune 1000 DB plan sponsors held company securities as pension assets in 2018. These allocations averaged 5.8% of pension assets in 2018 (4.4% when weighted by end-of-year plan assets). The weighted average is lower than the simple average because larger plans allocated lower percentages to company securities than did smaller plans.

None of the 39 sponsors that held company securities explicitly noted plan contributions in the form of company securities in 2018.

In 2018, company securities constituted 4% or less of pension assets in 51.3% of these plans and made up more than 10% of pension assets in 20.5% of them (Figure 7). 7

In 2018, company securities constituted 4% or less of pension assets in 51.3% of these plans and made up more than 10% of pension assets in 20.5% of them
Figure 7. Allocations to company stock, 2018

Source: Willis Towers Watson

Trends in allocations since 2009

To track asset allocation trends from 2009 to 2018, this part of the analysis is based on a consistent sample of 224 pension sponsors that have been in the Fortune 1000 over the past 10 years. Figures 8a and 8b show asset allocations for these companies on an aggregate and average basis for 2009, 2012, 2015 and 2018.

Figure 8a shows asset allocations for pension sponsors that have been in the Fortune 1000 over the past 10 years on an aggregate basis.
Figure 8a. Aggregate asset allocations by investment class for consistent sample of Fortune 1000 companies (%), 2009, 2012, 2015 and 2018

Notes: Cash includes cash equivalents and money market instruments; debt includes insurance contracts, and hedge fund assets include derivatives and interest rate swaps.
Source: Willis Towers Watson

Figure 8b shows asset allocations for pension sponsors that have been in the Fortune 1000 over the past 10 years on an average basis.
Figure 8b. Average asset allocation by investment class for consistent sample of Fortune 1000 companies (%), 2009, 2012, 2015 and 2018

Notes: Cash includes cash equivalents and money market instruments; debt includes insurance contracts, and hedge fund assets include derivatives and interest rate swaps.
Source: Willis Towers Watson

Over the period of this analysis, the shift from equities to fixed-income investments has been consistent. Since 2009, average allocations to public equities declined by 15.7 percentage points, while allocations to debt increased by roughly the same amount. Sponsors show a gradual search for return via low equity beta investments, with allocations to alternatives (including hedge funds, private equity and real estate) increasing from 6.6% in 2009 to 8.6% in 2018.

The total number of sponsors holding private equity and real estate in their alternative assets portfolios has increased from 30.4% and 49.1% in 2009 to 46.9% and 53.6% in 2018, respectively. Not only has the prevalence of companies holding these assets as part of their alternatives portfolio increased, but also the average holdings have ticked up slightly over the same period. Looking only into those plan sponsors with real estate assets in their portfolios, property investments represented an average of 3.6% of total plan assets in 2009 but ticked up slightly to 5.3% in 2018. Similarly, private equity holdings in 2009 averaged 5.3%, while by year-end 2018 the average was 6.3%.

Liability de-risking strategies and asset allocation

Between 2009 and 2018, among a consistent sample of 224 sponsors, the number of plans whose pensions held 50% or more in cash and fixed-income assets tripled, rising from 17% to 52% (Figure 8c). On average, this group consistently maintained significant amounts of risk-averse investments: 61.9% of cash and debt in 2009, and 67.2% in 2018.

Between 2009 and 2018, among a consistent sample of 224 sponsors, the number of plans whose pensions held 50% or more in cash and fixed-income assets tripled.
Figure 8c. Prevalence of companies with more than 50% of pension assets in cash/debt instruments for consistent sample of Fortune 1000 companies, 2009, 2012, 2015 and 2018

Source: Willis Towers Watson

The analysis shows a clear de-risking trend, with plan sponsors focusing more on hedging liabilities and less on higher returns. Many sponsors have also implemented liability-reduction strategies, such as offering lump sum buyouts, purchasing annuities and terminating their plans.

Conclusion

The year 2018 was evidence of the volatile scenarios for which plan sponsors need to prepare. After nine months of promising investment returns that left sponsors with strong expectations of significantly reducing their plans’ shortfalls, the fourth quarter’s downturn resulted in sponsors barely improving funding, mostly at the cost of employer contributions. In this sense, the role played by investment de-risking strategies such as glide paths or LDI — coupled with large contributions — is particularly noteworthy, where plans with more than 50% of their holdings invested in fixed income assets experienced the lowest funding drops or even showed improvements in their funding when coupled with substantial contributions.

Larger plans seem to be in a better position to access alternative investment strategies that seek to provide better risk-adjusted returns. For larger plans, alternative asset holdings are more than twice those of smaller plans — 14.1% versus 5.7% on average. In terms of plan status, frozen plans displayed conservative portfolios of almost 60% investments in cash and fixed income. Open and closed plans show a slightly less conservative risk profile, with each investing roughly 49% invested in cash and fixed income assets.

Since 2009, plan sponsors have been steadily shifting allocations away from public equities into debt and implementing LDI portfolios as part of a broader risk management strategy, a strategy that is likely to continue — or at least be reinforced — in the future.

Footnotes

1 See “2016 Asset allocations in Fortune 1000 pension plans,” Willis Towers Watson Insider, January 2018.

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

3 In previous studies, asset allocation analysis differentiated among the three levels under which fair value of assets is measured. Since the standard of reporting under Net Asset Value (NAV) became available to companies a couple of years ago, sponsors have increasingly been switching their valuation level to NAV (30% of aggregate assets surveyed were reported under NAV); therefore, this approach was discontinued from our analysis.

4 The 10 largest plans held 30.5% of all plan assets.

5 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 plan 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.

6 The accrual rate is the ratio between the pension’s service cost and the year-end projected benefit obligation.

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

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