Pension funding levels at large companies improved modestly at the end of last year, largely due to the moderate stock market gains and employer contributions. However, lower interest rates increased pension liabilities and continued to suppress funding levels to well below those in 2007 when the average pension plan was fully funded, according to new analysis by Towers Watson.
The Towers Watson analysis, known as the TW 100, examined pension data for the 100 publicly traded domestic organizations with the largest U.S. pension obligations. The results indicate that the average pension funded status has increased by three percentage points—from 80% at the end of 2009 to 83% at the end of 2010.
According to the analysis, the companies contributed just over $40 billion to their pension plans in 2010, significantly more than the $30 billion they contributed in 2009. Aggregate asset values for these plans grew from $843 billion at year-end 2009 to $926 billion at year-end 2010 roughly a 10% gain. While the aggregate funding status increased over the last year, funding status has still declined by $267 billion since the end of 2007.
The TW 100 companies had a 46-basis-point decline in discount rates from year-end 2009 to year-end 2010. In addition, corporate bond yields, which are important in calculating contribution requirements and financial statement costs related to pension plans, have declined significantly over time. For example, the Merrill Lynch 10+ High Quality Index yield, a benchmark for high-quality long duration corporate bond yields, declined from 9.39% at the end of 1990 to 5.34% at the end of 2010.
“The outlook for changes in funded levels this year and beyond remains uncertain. While we anticipate further improvement this year, largely due to employer contributions, the path to full funding is likely to be a long one,” said Mike Archer, a senior retirement consultant with Towers Watson. “Barring a significant extension of the capital market recovery or a big increase in interest rates, employers will have to contribute even more to meet expected increases in minimum required contributions and to eliminate the funding shortfalls of the past few years.”