Large companies operating pension funds enjoyed eye-popping investment returns in 2019, averaging almost 20%. Unfortunately, lower interest rates resulted in a large increase in future plan obligations that negated most of the investment gains.

According to a Willis Towers Watson study of defined benefit pension plans sponsored by 376 U.S.-based Fortune 1000 companies, their aggregate funded status barely inched up last year, reaching an estimated 87%. That was only a single percentage point higher than the funded status level at the end of 2018.

The analysis found that those sponsors’ collective pension deficit was estimated to be $216 billion at the end of 2019, slightly lower than the $222 billion deficit a year earlier. Pension obligations, however, increased 9%, from $1.58 trillion in 2018 to an estimated $1.72 trillion in 2019.

Pension plans’ overall 2019 performance continued a long run of frustration for plan sponsors, marked by disturbing shortfalls in assets needed to fund future obligations.

Since reaching a robust 106% at the end of 2007, just before the Great Recession struck, the aggregate funded status for plan-sponsoring Fortune 1000 companies has never surpassed 89%, according to Willis Towers Watson’s analysis. That mark was achieved at the end of 2013.

A 13-year low of 77% was established at the ends of both 2008 and 2011.

“Significant gains experienced in both the stock and bond markets should have bolstered the financial health of corporate pension plans in 2019,” said Joseph Gamzon, senior director, retirement, at Willis Towers Watson. “However, interest rates were at historically low levels and experienced the largest one-year drop in two decades, resulting in a huge increase in plan obligations and little overall change in the plans’ funded status.”

According to the analysis, pension plan assets increased in 2019 from $1.36 trillion at the end of 2018 to an estimated $1.50 trillion at the end of 2019.

Overall investment returns were estimated to have averaged 19.8% in 2019, although returns varied significantly by asset class. Domestic large-capitalization equities grew 32%, while domestic small/mid-capitalization equities realized gains of 28%.

Bonds recognized aggregate gains of 9%, while long corporate and long government bonds, typically used in liability-driven investing strategies, realized gains of 23% and 15%, respectively.

The analysis estimates that these companies contributed $26.3 billion to their plans in 2019. That was roughly half of what they contributed in 2018, when many plan sponsors took advantage of the higher tax deductions for pension contributions that existed before the Tax Cuts and Jobs Act of 2017. The larger deduction is no longer available to plan sponsors.

Looking ahead, conditions for plan sponsors are likely, if anything, to worsen. Funding relief enacted by Congress a decade ago, which shielded sponsors from the full impact of the low-interest-rate environment, is scheduled to phase out starting in 2021.

Expectations for continued low interest rates “will cause employers to face growing pressure on their plans’ expected rate of return assumptions at the same time as they prepare for higher required cash contributions due to the upcoming expiration of pension funding relief,” said Jennifer Lewis, also a senior director, retirement, at Willis Towers Watson.

That’s before even considering the fallout from a potential economic downturn. “If we unexpectedly enter another recession, and the five-year Treasury is trading at 1%, and equities give up part of their recent gains, that’s a really painful scenario for pensions,” Bob Browne, chief investment officer at Northern Trust, told PlanSponsor in mid-2019.

Current interest rates have a major impact on future pension plan obligations because sponsors use them in selecting a “discount rate” that reflects what a plan’s assets can reasonably be expected to earn over the long term. The lower the interest rates, the greater the present value of the liabilities.

Growing pension liabilities spurred by low interest rates have led large companies like General Electric to freeze plans and take other steps to keep liabilities in check.

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