Corporate Pension Plans Hit Hard in 2018

Pension funding has not fully recovered from the Great Recession

Stephen Miller, CEBS By Stephen Miller, CEBS January 8, 2019
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All major asset classes lost money in 2018, making it a hard year for employer-sponsored defined benefit pension plans. "A 15 percent drop in stock prices in the fourth quarter obliterated what was a promising year for pension finances," said Brian Donohue, a partner and actuary at Chicago-based October Three Consulting, a retirement plan advisory firm.

"The seesaw year in funded status we experienced in 2018 is a perfect example of why plan sponsors need to review their overall pension-management strategy as they move into 2019," said Royce Kosoff, senior consultant in the Philadelphia office of advisory firm Willis Towers Watson.

According to a Willis Towers Watson analysis, pension plan assets fell 4.7 percent on average in 2018, although returns varied significantly by asset class:

  • Domestic large-company stocks lost 4 percent, while domestic small- and midsize-company stocks lost 10 percent.
  • Aggregate bonds provided no return (0 percent); long-term corporate and long-term government bonds, which are typically used to fund upcoming liabilities, such as payouts to pensioners, logged losses of 7 percent and 2 percent, respectively.

October Three reported that a diversified stock portfolio lost almost 8 percent for all of 2018, and a diversified bond portfolio lost 1 percent to 4 percent, with long-duration bonds and corporate bonds faring worst.

Overall, a traditionally balanced pension portfolio holding 60 percent stocks and 40 percent bonds lost more than 5 percent for the year, Donohue said, while a bond portfolio holding a conservative 20 percent in stocks and 80 percent in bonds was still down more than 4 percent for the year.

[SHRM members-only toolkit: Designing and Administering Defined Benefit Retirement Plans]

Underfunding Still Common

Willis Towers Watson estimates that, among big Fortune 1000 corporations, pensions were on average underfunded, with assets sufficient to meet just 84 percent of expected liabilities. That's better than the 77 percent funding level for these pensions in 2012. However, in 2007, before the Great Recession, Fortune 1000 pensions were overfunded with a cushion to meet 106 percent of expected liabilities.

Looking Ahead

Donohue noted that "the persistence of historically low interest rates … means that pension sponsors that have only made required contributions will see contributions ramp up in the next few years" to try to make up funding shortfalls, as the impact of pension-funding relief that Congress passed in the wake of the Great Recession fades.

Kosoff expects that pension plan sponsors "will continue to express interest in risk management strategies," such as revisiting their investment approach or offering vested participants a lump-sum payment in lieu of a monthly check throughout retirement.

Participants cannot be forced to accept a lump-sum payout. These voluntary offers are generally targeted to former employees who are fully vested in their pension benefits but not yet old enough to collect them.

Plans can offer lump sums even if they are underfunded.

Another risk-reduction strategy is for a plan sponsor to transfer the plan's obligations to an insurance company by converting the pension into an insurance annuity. With annuity transfers, participant consent is not required, and retirees' monthly payments, now made by the insurer, are not guaranteed by the federal Pension Benefit Guaranty Corporation.

Annuity transfers often involve additional contributions to fully fund plan liabilities before the transfer, and this approach is generally more expensive to implement than a lump-sum payout, pension consultants point out.

Abandoning the Plan

In 2019, as in previous years, some defined benefit plan sponsors will close their plan to new participants and freeze benefit accruals for existing participants, while perhaps raising their contributions to employees' defined contribution 401(k) plans. 

Other defined benefit plan sponsors are shifting from a traditional pension to a hybrid cash balance plan, where the plan's investment performance poses less risk to employers than traditional pensions do. According to a 2018 report from October Three Consulting, close to 60 percent of cash balance plans that arose due to the conversion from a traditional pension plan continue to provide benefit accruals.

And some employers will take more conclusive actions. In 2018, for instance, labeling and packaging company Avery Dennison terminated its pension plan, eight years after first freezing the program.

MetLife's latest Pension Risk Transfer Poll found that 76 percent of defined benefit plan sponsors with de-risking goals plan to completely divest all of their company's pension plan liabilities at some point in the future, including 10 percent of plan sponsors that will completely divest their plans within the next two years. Survey responses were received from 102 defined benefit plan sponsors in August and September 2018.

Related SHRM Articles:

Cash Balance Plans Help Fill the Retirement Savings Gap, SHRM Online, March 2017

Companies Eye Pension De-Risking, HR Magazine, February 2016

From Defined Benefit to Defined Contribution: A Systematic Approach to Transitioning Retirement Plans, SHRM Online, January 2012


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