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Corporate Pension Plan Funding Levels Declined Modestly in 2012 Keeping Most Plans Considerably Underfunded

Posted on 08 Jan 13 by Annie George

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 global professional services company Towers Watson (NYSE, NASDAQ: TW). In the first look at estimated year-end pension plan results, Towers Watson found that 2012 pension plan funding levels declined for the second consecutive year and remained well below healthy levels.

The Towers Watson analysis examined pension plan data for the 429 Fortune 1000 companies that sponsor U.S. defined benefit pension plans and have a December 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," said 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 Towers Watson 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 here.

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.

"Plan sponsors face an interesting choice regarding their pension plan funding strategy for 2013," said Alan Glickstein, a senior retirement consultant at Towers Watson. "Some employers may view current interest rates as not just historically low, but also artificially low. These employers may consider their funded status as closer to 100% and will be more inclined to take advantage of the option to reduce contributions based on funding relief. Other employers, however, believe the current economic environment will linger for years and may view current funding levels as more realistic. These employers may choose to make significant additional contributions to their plans."

About the Analysis

The companies analyzed represent 429 Fortune 1000 firms with December fiscal-year-end dates for which complete data were available. These figures are estimates of U.S. plan assets and liabilities. Actual year-end 2012 results will not be publicly available until spring.