Funded Status of Corporate Pension Plans Held Steady in 2022

​The funded status of the nation's largest corporate pension plans lost momentum last year, ending a 10-year streak toward full funding. But the good news is that funded status still held steady throughout the year, in part due to weak investment returns that offset lower pension liabilities created by higher interest rates.

New analysis out from WTW examining pension plan data for more than 350 Fortune 1000 companies that sponsor U.S. defined benefit pension plans found that the aggregate funded status of these plans at the end of 2022 was estimated to be 95 percent, the same level as at the end of 2021. The consulting firm's analysis also found the funding deficit was projected to be $62 billion at the end of 2022, down from $80 billion at the end of 2021. Pension obligations declined 26 percent from $1.73 trillion at the end of 2021 to an estimated $1.28 trillion at the end of 2022.

"Despite asset performance being down during 2022, the historic rise in interest rates also lowered pension liabilities, resulting in no change in funded status for U.S. corporate pension plans as a whole," said Jason Wilhite, senior director of retirement at WTW. "And while funded status on companies' balance sheets may be largely unchanged, some sponsors may be faced with higher pension costs heading into 2023 due to the interest rate environment."

Joanie Roberts, also a senior director of retirement at WTW, told SHRM Online that the good news is that in aggregate, large pension plan sponsors' funded positions held steady even through a historically volatile year for capital markets. "Much of this can be attributed to pension obligations declining along with the associated assets that back those obligations."

WTW also found that pension plan assets declined 26 percent in 2022, finishing the year at $1.22 trillion. Overall investment returns are estimated to have averaged -19 percent in 2022, although returns varied significantly by asset class.

Market volatility is still having an impact on retirement plans, with fears of a recession later this year taking a toll.

Roberts cautioned that plan sponsors should stay vigilant relative to their cash and accounting costs in 2023 and beyond. "In a higher interest rate environment, plan assets will need to achieve higher returns in order to keep pace with liability growth, and higher-than-anticipated cash contributions could be on the horizon as a result," she said.

Regardless of funded position, she said, all plan sponsors would be "well-advised to review their strategy for managing pension risks during 2023, considering the integration of both assets and liabilities."

"Variables such as funding level, inflation and capital market volatility may inform how plan sponsors may adjust their risk management strategies in the short and long term," she said.

Those factors are all causing changes to retirement planning at large. A year of high inflation has put pressure on employees' finances, causing them to alter retirement contributions and even dip into their post-work savings to pay for short-term expenses. Betterment at Work, a New York City-based financial services firm, for instance, recently found that 28 percent of employees made withdrawals from their retirement savings last year. Meanwhile, three-quarters of employees say market volatility has impacted their retirement account balances.