Defined Benefit Pension Funding Up Modestly

Average plan only 83% funded at end of 2010; higher contributions likely in the short term

By Stephen Miller, CEBS May 2, 2011

Funding levels for defined benefit pension plans at large U.S. companies improved modestly at the end of 2010, largely because of moderate stock market gains and employer contributions. However, lower interest rates increased pension liabilities and continued to suppress funding levels to well below those in 2007, when the typical U.S. pension plan was fully funded, according to new analysis by consultancy Towers Watson.

The Towers Watson analysis, known as the TW 100, examined pension data for the 100 publicly traded organizations with the largest U.S. pension obligations. Among the findings:

The average pension funded status increased by 3 percentage points—from 80 percent at the end of 2009 to 83 percent at the end of 2010.

Employers contributed just over $40 billion to their pension plans in 2010, significantly more than the $30 billion they contributed in 2009.

Aggregate asset values for the plans grew from $843 billion at year-end 2009 to $926 billion at year-end 2010, roughly a 10 percent gain.

While the aggregate funding status increased over 2009, funding status still declined by $267 billion since the end of 2007, when the average pension plan was fully funded.

“Employer contributions helped the funded status of many pension plans in 2010," said Mike Archer, a senior retirement consultant at Towers Watson. However, "historically low interest rates translated to lower discount rates, which significantly increased plan liabilities. With lower assumed interest rates, many employers find themselves making little headway to reduce their pension deficits,” he noted.

Many employers find themselves making little headway
to reduce their pension deficits.

Near-Term Outlook

“The outlook for changes in funded levels in 2011 and beyond remains uncertain," said Archer. "While we anticipate further improvement [in 2011], largely due to employer contributions, the path to full funding is likely to be a long one. Barring a significant extension of the capital market recovery or a big increase in interest rates, employers will have to contribute even more to meet expected increases in minimum required contributions and to eliminate the funding shortfalls of the past few years.”

Mark Ruloff, director of asset allocation at Towers Watson Investment Services, added, “Sponsors are recognizing that changes in interest rates influence the level of benefits paid from their plans in unintended ways and are starting to address these issues. Employers are also revisiting other facets of their overall strategy, from accounting methods and assumption-setting processes to the implementation approach for liability-driven investment strategies.”

Additional Findings

Other highlights from the analysis include:

Investment returns for 2010 were not as strong as those realized in 2009, but sponsors experienced two solid years of investment gains after the financial crisis in 2008. In 2009, the average investment return was 17.8 percent, and in 2010, it was 13 percent.

Discount rates used to calculate plan liabilities fell, on average, 47 basis points (from 6.39 percent to 5.92 percent) from 2008 to 2009. In 2010, interest rates fell an additional 46 basis points so that by the end of 2010, the average discount rate was 5.46 percent.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related Articles:

Time to Reconsider Cash Balance Plans?, SHRM Online Benefits Discipline, March 2011

Pension Priorities Focus on Volatility, Long-Term Strategies, SHRM Online Benefits Discipline, February 2011

New Benchmark Interest Rate Affects Pension Lump Sums, SHRM Online Benefits Discipline, February 2011

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