The funded status for the nation’s largest corporate defined benefit pension plans remained level in 2022, overcoming a sharp drop in plan assets during a challenging year for investments, according to an analysis from WTW, a global advisory, broking and solutions company.
WTW’s annual report showed that the corporate pension plans evaluated in the study finished 2022 with a funded status of 95% – the same funded status plans held at the conclusion of 2021. Funded status has grown substantially since 2012, when it stood at 77%. The year of flat growth in 2022 followed a year of sharp growth in 2021, when funded status rose from 88% to 95%. Funded status has not touched 100% since 2007, when it was a robust 107%, according to WTW.
Joanie Roberts, senior director, retirement, at WTW, said plan sponsors should be wary of being “lulled into a false sense of security because their accounting funded ratio remained flat or increased during 2022.”
“The risk of increased accounting costs and increased required contributions still remains, so plan sponsors should remain actively engaged in the financial management of their plans,” Roberts said.
WTW’s analysis included 356 Fortune 1000 companies. The report determined that plan assets declined 26% in 2022, ending the year at $1.22 trillion – in comparison, overall investment returns are estimated to have averaged a decline of 19% during the year, according to WTW. According to the company’s analysis, the funding deficit is projected to be $62 billion at the conclusion of 2022, a drop from $80 billion at the end of 2021. Pension obligations declined 26% from $1.73 trillion at the end of 2021 to an estimated $1.28 trillion at the end of 2022.
“Corporate pension plans’ 10-year march toward full funding lost momentum in 2022,” said Jason Wilhite, senior director, retirement, WTW, in a press release. “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. 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.”
WTW’s research found that 2022 was a record year in pension risk transfers, while cash contributions were lower than in typical years.
“As pension funded status has improved, plan sponsors have continued to turn to the annuity purchase market to de-risk obligations from their balance sheet as well as manage overall operational costs, thus the market has been growing for some time,” Roberts said. “Through Q3 2022, there had been $43.9 billion in annuity purchase volume vs. 2021’s level of $38.0 billion for the entire year. Sponsor contributions during 2022 were lower than previous years again due to improved funded status coming into 2022, and the funding relief provided in the American Rescue Plan Act passed in 2021, which provided plan sponsors with relief from low-interest rates and a longer time horizon to fund pension shortfalls.”
The decline in fund asset values may increase the risk of future pension contributions, Roberts said.
“Unlike accounting obligations, the obligations used to determine minimum funding requirements often do not fluctuate with current bond rates,” Roberts said. “Instead, they will remain at steady levels while the underlying assets supporting those obligations likely declined significantly in 2022. Therefore, the shortfall of assets compared to liabilities may have increased, and the ability of the plan’s funded position may be unable to absorb further investment volatility without requiring sponsor contributions.”
In the year ahead, Roberts said plan sponsors should evaluate and consider potential adjustments based on ongoing conditions for corporate pension plans, their unique position relative to their funded position and their current investment allocation.
“For 2023 specifically, sponsors may want to analyze multiple economic scenarios specific to their plan to better understand the impacts of variables like inflation, capital market performance and valuation methods,” Roberts said. “Sponsors may also want to understand the potential effect that any workforce actions may have on plans (particularly for plans that allow participants to elect a lump sum distribution). From a longer-term perspective, plan sponsors may want to revisit how their current risk management strategy may need to evolve, including funding, investment and settlement strategies.”