Benefits and Compensation

Asset Rallies May Not Stem Soaring Pension Liabilities, Report Says

If it seemed to you that investment and funding decisions for your defined benefit plan in 2012 were at odds with each other, you weren’t alone.

In its annual report on DB plans, global employee benefits consultant Towers Watson says that in 2012, once again there were many investment contradictions for U.S. DB plan sponsors: Strong market returns still failed to slow the rapid rise of plan liabilities caused by historically low interest rates. And that could spell more work for plan sponsors in exercising their fiduciary duty to make sure funds are viable and secure.

For some DB plan sponsors, including 12 of the 100 DB plans Towers Watson monitors, 2012 growth in assets and liabilities was notable, but tempered by lump sum distributions that significantly reduced that growth.

Market rallies during the year helped assets finally rebound to 2007 levels, but at the same time, liabilities have soared by 40 percent since 2008, the report said.

Towers Watson’s annual report is based on new disclosures in the Securities and Exchange Commission 10-K filings of 100 sponsors of pension plans at large, publicly traded companies. Its analysis showed the aggregate funded status of the plans in the TW Pension 100 index fell in 2012 to 77 percent from 79 percent at the end of 2011. The index’s pension benefit obligation deficit actually rose to $295.2 billion from $252.7 billion, an increase of roughly $42 billion, but roughly the same amount was cut in aggregate from some sponsors’ balance sheets with lump-sum buyouts or annuity purchases for certain DB participants. (A plan’s funded status is the difference between plan assets and its PBO).

Since 2007, the gap between PBO and plan assets for the TW Pension 100 index has grown by $381.6 billion, Towers Watson noted.

Despite the second straight year of declines in funded status registered by its index, the consulting firm said pension plans are off to a good start in 2013. A strong equities market in the first quarter and roughly a 20-basis-point increase in interest rates have reversed the downward trend of the last few years, it said.

“Obviously, there is a long way to go until the end of the year, but funding ratios are moving in the right direction. If interest rates don’t continue their rise and equity returns weaken, plan sponsors may need to pour more cash into their plans to improve funded status for the full year,” said Dave Suchsland, a senior consultant at Towers Watson.

Finding out More

To read the complete story on Thompson’s HR Compliance Expert, click here.

To learn more about IRS-required funding target attainment percentages and establishing and maintaining plan funding balances, see ¶132 of the Pension Plan Fix-It Handbook.

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