Sizable employer contributions didn’t offset low interest rates, weak stock market
While employers continue to make sizable cash contributions to their pension plans, declining interest rates and, to a lesser extent, weak asset returns, reduced the average funded status of Fortune 1000 pension plans by four percentage points during 2011, according to a new analysis by global professional services company Towers Watson (NYSE, NASDAQ: TW).
The Towers Watson analysis examined U.S. pension data for Fortune 1000 companies with fiscal years ending in December (422 companies) and estimated their funded status for 2011 as reported for financial accounting purposes. The results indicate that the average pension funded status declined from 80% at the end of 2010 to an estimated 76% at the end of 2011. This marked the first year since 2008 that pension plan funding levels declined. Average funding levels had improved in both 2009 and 2010 largely due to positive stock market returns and significant employer contributions (offset, in part, by movements in interest rates). The analysis also found that employers contributed more than $70 billion into their pension plans in 2011.
“The return to fully funded pension plans got sidetracked somewhat last year,” said Mike Archer, senior retirement consultant at Towers Watson. “Employers’ sizable cash contributions to their plans could not counteract the effects of lower interest rates and poor stock market results. Despite the small setback, pension plans are still in better shape than they were right after the financial crisis.”
The analysis also found that pension plan assets increased by 1% last year, from $1,193 billion in 2010 to an estimated $1,201 billion in 2011. However, total assets remain well below what they were in 2007, the last year that the average pension plan was fully funded.
“With interest rates expected to remain low this year, it’s inevitable that many plan sponsors will be making significant cash contributions in 2012. What would be helpful for plan sponsors is much-needed relief that would help manage the impact of volatility in interest rates and encourage employers to fully fund their plans as the fragile economic recovery continues,” said Alan Glickstein, a senior retirement consultant at Towers Watson.
Other findings from the analysis include:
Pension deficits at the companies studied swelled by more than $110 billion over the last year — from $229 billion in 2010 to $343 billion in 2011. Only 5% of plans were estimated to be fully funded.
One in three (33%) Fortune 1000 companies had estimated pension funding levels under 70% at the end of 2011, a big increase from 21% at the end of 2010.
*Editor’s note: The 422 companies analyzed represent Fortune 1000 firms with December fiscal year-end dates for which complete data were available. These figures are estimates of U.S. plan assets and liabilities. Actual year-end 2011 results will not be publicly available until spring 2012 and will be reported through the Towers Watson 100 results, which include the 100 largest publicly traded U.S. plan sponsors with year-end 2011 fiscal dates.
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