Fourth Quarter Returns Derail Better Year for Pension Funded Status

The funded status of the nation’s largest corporate pension plans slipped at the end of 2018 as a sharp decline in the stock market during the fourth quarter offset what looked to be a second consecutive year of improved funding, according to an analysis by Willis Towers Watson.

The firm’s analysis of defined benefit (DB) plans for Fortune 1000 companies showed that after the first nine months of 2018, the aggregate pension funded status stood at 90%. However, the aggregate pension funded status is estimated to be 84% at the end of 2018, compared with 85% at the end of 2017.

While the pension deficit for these plans is projected to be $255 billion at the end of 2018, slightly lower than the $260 billion deficit at the end of 2017, pension plan assets declined from $1.48 trillion at the end of 2017 to an estimated $1.33 trillion at the end of 2018. Willis Towers Watson says overall investment returns are estimated to have averaged a negative 4.7% in 2018, although returns varied significantly by asset class. Domestic large capitalization equities lost 4% while domestic small/mid-capitalization equities realized losses of 10%. Aggregate bonds provided no return (0%); long corporate and long government bonds, typically used in liability-driven investing strategies, realized losses of 7% and 2%, respectively.

Even accelerated contributions to DB plans did not help funded status end on a higher note. Many plan sponsors took advantage of deductions at the older, higher tax rates which existed before the tax law changes, and Willis Towers Watson estimates these companies contributed $47 billion to their pension plans in 2018. Total pension obligations declined from $1.74 trillion in 2017 to an estimated $1.59 trillion in 2018.

“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,” says Royce Kosoff, managing director, Willis Towers Watson. “The volatility in the fourth quarter, and especially in December, which was one of the worst months since the Great Recession, demonstrates how quickly conditions change. We expect sponsors will continue to express interest in risk management strategies, such as revisiting their investment approach or transferring obligations via an annuity purchase or through lump sum buyouts.”