Towers Watson

Financial Health of Largest U.S. Corporate Pension Plans Improved Sharply in 2013, Towers Watson Analysis Finds

Improved funding, if sustained, could trigger more pension de-risking initiatives

NEW YORK, March 20, 2014 — The financial health of corporate America's largest pension plans improved significantly in 2013 as funding improved to a level not seen since the start of the financial crisis, according to a new analysis by Towers Watson (NYSE, NASDAQ: TW), a global professional services company. The analysis cited rising interest rates, which lowered liabilities, and moderate investment returns as the primary reasons for the overall improvement.

The analysis of year-end corporate disclosures found that the pension deficit for the 100 largest pension sponsors among U.S. publicly traded organizations fell 57%, from $295.5 billion at year-end 2012 to $125.9 billion at year-end 2013, a decrease of $169.6 billion. The pension deficit for these companies hasn't been this small since 2007, when plans had a surplus of $82.3 billion. Meantime, the overall average funded status jumped 13 percentage points, from 78% at the end of 2012 to 91% at the end of 2013. That is the best funding level since the end of 2007, when the average stood at 103%. Additionally, the number of plan sponsors with fully funded plans surged from five at the end of 2012 to 22 at the end of 2013. At the end of 2007, half of these 100 plans were fully funded.

"Plan sponsors made great strides to shore up the financial condition of their pension plans last year," said Dave Suchsland, senior consultant at Towers Watson. "The rising stock market, combined with higher interest rates for the first time in five years, pushed funding levels significantly higher. This is good news for employers, as stronger pension fund balance sheets will reduce required cash contributions in the near term while lower pension costs will improve corporate earnings."

According to the analysis, companies continued to contribute relatively large amounts to their plans during 2013, with sponsors' median contribution being 60% more than the value of benefits accruing during the year. However, the contribution levels were much lower than in prior years. For 2013, plan sponsors contributed $27.8 billion, down from $45.2 billion in 2012. That's the smallest contribution since 2008, when companies added $16.8 billion to their plans. After many years of making large contributions, some sponsors took contribution holidays or decided to contribute significantly less in 2013. Six of the 10 largest cash contributors in 2012 pumped $11.3 billion into their plans, compared with $0.8 billion in 2013.

"It will be interesting to see how the improved funding levels, if sustained, and overall financial health of pension plans will affect plan sponsors' pension de-risking efforts in 2014," said Alan Glickstein, senior retirement consultant at Towers Watson. "The improved funded position, combined with recent increases in Pension Benefit Guaranty Corporation premiums and a newly released Society of Actuaries mortality study, will make de-risking actions very attractive in 2014."

Other findings from the analysis include:

• Investment returns. During 2013, market returns outperformed expectations at the beginning of the year for most plan sponsors. Average investment returns were 10.8%.
• Investment allocations. Plan sponsors have been gradually shifting asset allocations from public equities to fixed income and alternative investments to reduce investment risk relative to liabilities. 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.
• Discount rate. After falling for four years, the average discount rate increased 83 basis points, from 4.02% in 2012 to 4.85% in 2013. Interest rates still remain more than 150 basis points lower than in 2008.

About the Analysis

The analysis was based on U.S. pension disclosures for the 100 largest pension plan sponsors among U.S. publicly traded companies with year-end 2013 fiscal dates, ranked by amount of plan liability at the end of 2012.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has more than 14,000 associates around the world and is located on the web at towerswatson.com.