Towers Watson: DB funding levels declined last year

The funded status of the nation’s largest corporate pension plans declined in 2012 as falling interest rates, which increased liabilities, offset both strong stock market returns and significant employer contributions, according to a new analysis by Towers Watson. In the first look at estimated year-end pension plan results, Towers Watson finds that 2012 funding levels declined for the second consecutive year and remained well below healthy levels.

The analysis examined pension plan data for the 429 Fortune 1000 companies that sponsor U.S. defined benefit pension plans and have a Dec. 31 measurement date. Results indicate that the aggregate pension funded status is estimated to be 75% at the end of 2012, compared to 78% at the end of 2011. Overall, pension plan funding decreased by $79 billion last year, leaving a deficit of $418 billion at the end of 2012.

“Despite the strong stock market and, to some extent, bond market performance, employers were not able to gain ground in their quest to more fully fund their pension plans last year,” says Mike Archer, a senior retirement consultant at Towers Watson. “A further drop from already historically low interest rates fueled an increase in liabilities, which more than offset investment returns for the year, leaving the funding status of most plans worse.”

The analysis estimated that companies contributed $72 billion to their pension plans in 2012. The contribution estimate is likely conservatively high given the funding relief that was made available in 2012. Some companies took the opportunity to deploy cash elsewhere, while others made unusually large contributions during the year. If actual contribution levels end up reflecting significant use of funding relief, funded status could be one or two percentage points worse than estimated.

Pension plan assets increased by an estimated 4% in 2012, from $1,218 billion at the end of 2011 to an estimated $1,266 billion at the end of last year.