For the first time in 16 years, defined benefit pension plans sponsored by large companies are, in the aggregate, fully funded.
As a group, the 358 plan-sponsoring Fortune 1000 companies with fiscal years ending in December finished 2023 with an estimated 100% of the funding needed to cover future plan liabilities, according to an analysis by Willis Towers Watson (WTW).
It’s a long look back to the end of 2007 when such companies enjoyed an aggregate 107% funding status. It was right at that time, though, that the economic crisis swamped financial markets, and within a year the aggregate funding level had plunged to 77%.
It was a calamity for the balance sheets of plan sponsors, who were faced with the need to boost plan contributions at the same time their access to credit diminished. It’s been an arduous climb back to sea level for funded status since then, although the pace has picked up in recent years.
Jason Wilhite, senior director of retirement for WTW, called the return to full funded status “an important milestone.”
“The improvement in the financial health of corporate pension plans in 2023 is welcome news to plan sponsors,” Wilhite said. said. “There’s been a significant psychological effect on them from seeing the funded stats rise [faster] over the last few years.”
Interest Rate Impact
Plan assets for the 358 companies fell by 1% last year. That resulted from a continuing trend of sponsors offloading plan risk (largely through annuity purchases), a slowdown in their cash contributions, and falling interest rates in the second half of the year.
Lower interest rates have a much greater negative impact on the status of funding for future liabilities than they do on current assets.
However, in terms of funded status, the moderation in rates was more than offset by strong gains in both the equity and bond markets, with investment returns averaging 10.4%. Equity returns in the fourth quarter were particularly outsized.
Returns varied by asset class. For the year, domestic large-cap equities increased by 26%, compared to 17% for small and midcap equities, 11% for long corporate bonds, and 3% for long government bonds.
Overall, the $25 billion funding deficit for the large plan sponsors at the end of 2022, when the aggregate funded status was 98%, was wiped out in 2023.
Wilhite noted, though, that many plans remain underfunded. “Companies consider a plan’s funded status to be like debt –– if you’re underfunded, the organization is more highly leveraged,” he said. On the other hand, “overfunded plans can use those excess assets to provide other types of benefits, or additional ones, through the pension plan.”
Still, overfunded plans generally have moved to safer investments such as long bonds, Wilhite said, while underfunded plans tend to take on a bit more risk to fill the funding gap