Funded status of largest U.S. corporate pension plans ends 2023 at 100%
- Pension plans reached full funding for the first time since the 2008 financial crisis
- Investment returns outpaced pension liability movements created by falling interest rates
- Pension obligations declined slightly from $1.23 trillion at the end of 2022 to an estimated $1.19 trillion at the end of 2023
- Overall investment returns averaged 10.4% in 2023, with varying returns by asset class
- Domestic large capitalization equities increased by 26%, while domestic small/mid-capitalization equities rose by 17%
- Pension plan assets declined 1% in 2023, finishing the year at $1.19 trillion
- Decline in assets year over year resulted from active pension risk transfers and lower cash contributions
Insights
Pension fund solvency is closely tied to the overall financial health of corporations. The announcement that the funded status of corporate defined benefit (DB) pension plans has reached full funding represents a significant shift in the pensions landscape. The move from a $25 billion deficit to full funding demonstrates a robust recovery and is a testament to the efficacy of financial management strategies implemented by plan sponsors.
However, the decline in pension obligations alongside the slight decrease in pension plan assets suggests a complex interplay between investment performance, pension risk transfers and lower cash contributions. The varied performance across asset classes, with domestic large cap equities outperforming bonds, reflects the importance of asset allocation decisions in achieving pension fund objectives. Plan sponsors may now be in a position to consider de-risking strategies, such as liability-driven investing, to lock in gains and stabilize funded status against future market volatility.
The long-term implications for stakeholders include the potential for reduced corporate financial risk and improved creditworthiness, as fully funded pension plans decrease the need for future cash contributions. However, the reliance on equity performance and the impact of interest rates on liability valuation present ongoing risks that must be managed carefully.
The attainment of full funding status in DB pension plans has significant implications for financial risk management. With the funded status of these plans reaching 100%, corporations may experience an improvement in balance sheet strength. This milestone can enhance investor confidence and potentially lead to favorable credit ratings.
Despite the positive news, the reliance on equity markets to achieve these returns does introduce a level of systemic risk. A downturn in the market could swiftly alter the funded status of these plans, necessitating increased contributions or alternative risk management strategies. Additionally, the decline in interest rates poses a challenge for future liability valuations, potentially increasing the pension deficit if rates continue to fall without a corresponding increase in asset returns.
Risk managers will need to closely monitor market conditions and interest rate movements to ensure that pension plans remain fully funded. The use of liability-driven investment strategies may gain prominence as a means to match asset growth with liability obligations, thereby mitigating the impact of market fluctuations on funded status.
From a corporate finance perspective, the achievement of full funding status in pension plans can lead to strategic shifts in how companies manage their capital. With a reduced need for cash contributions to pension plans, companies might reallocate capital towards growth initiatives, debt reduction, or shareholder returns. This reallocation can have a positive impact on stock performance, as it signals financial stability and prudent management to investors.
However, the sustainability of this funded status depends on continued prudent financial management and the economic environment. Companies will need to balance the temptation to reduce pension contributions with the need to prepare for future volatility. The historical volatility in funding levels, as shown in the provided data, underscores the importance of maintaining a conservative approach despite the current funded status.
Moreover, the potential for future pension risk transfers could alter the pension landscape further, as companies seek to offload pension liabilities to insurers. This could result in a shift in the risk profile of the company, affecting both the balance sheet and the company's financial strategy.
Equity gains helped to offset liability headwinds from falling interest rates, bringing pension plans to full funding for the first time since the 2008 financial crisis
ARLINGTON, Va., Jan. 02, 2024 (GLOBE NEWSWIRE) -- The funded status of the nation’s largest corporate defined benefit (DB) pension plans attained an important milestone in 2023 as investment returns outpaced pension liability movements created by falling interest rates, according to an analysis by WTW (NASDAQ: WTW), a leading global advisory, broking and solutions company.
WTW examined pension plan data for 358 Fortune 1000 companies that sponsor U.S. DB pension plans and have a December fiscal year-end date. The aggregate pension funded status of these plans at the end of 2023 is estimated to be
Fortune 1000 aggregate pension plan funding levels
| Year | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | ||||||||||||||||
| Aggregate level |
*Estimated
“The improvement in the financial health of corporate pension plans in 2023 is welcome news to plan sponsors,” said Jason Wilhite, senior director, Retirement, WTW. “Last year proved to be an up and down year for interest rates and equity markets, particularly during the fourth quarter. But overall, funded status remained relatively stable as interest rates and equity markets largely offset each other, yet it ended the year reaching an important threshold. Additionally, many plan sponsors have made changes to their financial management strategy over the years that are designed to protect funded status.”
According to the analysis, pension plan assets declined
“As we move into 2024, plan sponsors will want to ensure that the cost and risk associated with their DB and other retirement plans remain aligned with their financial objectives. And while DB plans overall are in a strong funded position, the outlook may vary widely based on an individual plan’s position. Some employers may need to accelerate future cash contributions, while others may find that a well-funded plan provides them with additional flexibility to reduce risk or even finance other retirement benefits for employees,” said Joanie Roberts, senior director, Retirement, WTW.
About the analysis
WTW analyzed 358 Fortune 1000 companies with December fiscal year-end dates for which complete data were available. The 2023 figures are estimates of U.S. plan assets and liabilities. The earlier figures are actual. Actual year-end 2023 results will be publicly available in a few months.
About WTW
At WTW (NASDAQ: WTW), we provide data-driven, insight-led solutions in the areas of people, risk and capital. Leveraging the global view and local expertise of our colleagues serving 140 countries and markets, we help organizations sharpen their strategy, enhance organizational resilience, motivate their workforce and maximize performance.
Working shoulder to shoulder with our clients, we uncover opportunities for sustainable success—and provide perspective that moves you. Learn more at wtwco.com.
FAQ
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