Willis Towers Watson conducted a study of pension plan data for 376 Fortune 1000 companies that sponsor U.S. DB plans (RDK’s editorial comment: really too bad that only 376 of top Fortune 1,000 offer a DB plan). Results of the study indicate that the aggregate pension funded ratio is estimated to be 79% as of March 31. This is a significant drop from 87% registered at year-end. This level of funding marks the lowest funded status plans have experienced since 2012, when the year-end funded status stood at 77%.
The 376 plans now have an estimated pension deficit of $365 billion as of March 31, which is dramatically greater (up $136 billion) than the $229 billion deficit at the end of last year. Unlike pension asset values that plummeted, pension liability growth was more muted despite falling interest rates, as corporate bond spreads widened considerably. The total estimated liability stands at $1.76 trillion up from $1.75 trillion at December 31, 2019.
What I find most disconcerting about this result is the fact that Corporate America has done a much better job of taking risk off the table. I can only imagine the hit that DB plans in the public and multiemployer space took as a result of having much more aggressive asset allocations that favor equities and equity-like products relative to fixed income. Furthermore, both public and multiemployer plans entered this market disruption in poorer shape than Corporate plans.
You make several tremendously important points in this valuable piece. First, the unhedged equity exposure in DB pension plans is a tremendous risk. Fortunately, plans can mitigate much of this risk without losing growth by shifting their focus from Intermediate credit bonds to long treasuries.
Also important is your critical insight into the precarious funding level of public pensions. Few of these have moved toward a liability driven view of risk. But even more troubling is the fact that they continue to hold a return On assets approach to valuing their liabilities. Many are still using 7% discounting rate which is perhaps double the true value that corporations are required to use. So, very low funding ratios of public plans are probably overstated by a factor of at least two times. There is no way to grow out of this deficit; the solution will require substantial contributions from tax dollars and revising benefits downward. These are better pills to swallow, and such action is unlikely to happen anytime soon. But you can’t kick the can down the road forever.
Thank you for sharing your thoughts, Stephen. Couldn’t agree more that change is needed and it starts with an honest valuation of the promises that have been made.