Last year marked the strongest year for corporate pension plans since before the global financial crisis.
Global advisory firm Willis Towers Watson estimates that the aggregate funded status of the largest corporate pension plans in the U.S. jumped to 96 percent in 2021, an eight percentage point increase from the end of 2020.
The consulting and investment firm analyzed pension plan data for 361 Fortune 1000 companies that sponsor U.S. defined benefit pension plans and have a December fiscal year-end date. While the actual year-end 2021 results won’t be available for a few months, WTW’s estimates for the 2021 fiscal year show that the nation’s largest corporate pension plans achieved the highest aggregate funded status since 2007, when plans were 107 percent funded. In the years between, the overall funded level for country’s largest corporate pension plans hovered between 71 percent and 89 percent.
In a Monday press release, WTW attributed the sharp improvement to strong investment returns and rising interest rates. The firm estimated that the 2021 investment returns of the country’s largest corporate pension plans averaged 8.9 percent.
“There’s two clear drivers of the increase we saw this year: Equity returns certainly were at higher levels than we’ve seen, and the increases in interest rates decreased the liabilities,” Jennifer Lewis, WTW’s senior director of retirement, told Institutional Investor. “The combination of the two led to that 8 percentage point increase in aggregate funded status.”
Another investment consulting firm, Wilshire, similarly reported a 7.5 percentage point increase from December 2020, estimating that corporate pension plans ended 2021 with an aggregate funded status of 95.3 percent. In a statement Monday, Wilshire said the improvement was “primarily due to a 6 percentage point decrease in liability and a 2 percentage point increase in asset values.”
According to WTW, corporate pension plans’ investment returns varied drastically by asset class. Domestic large capitalization equity portfolios grew 29 percent in 2021, while U.S. small- and mid-cap equities generated gains of 18 percent. But fixed income portfolios didn’t fare so well, with investments in aggregate, corporate, and long government bonds delivering losses of 2 percent, 1 percent, and 5 percent, respectively.
Overall, corporate pension plans’ assets increased by 1 percent, driven largely by outperformance in equities, Lewis said.
WTW said 2021 was also a record for pension risk transfers, instances in which defined benefit plans offload a portion of their liabilities. Lewis said she expects this trend to continue into 2022.
“We think that there are a lot of opportunities for plans in 2022 as plans are close to or above full funding levels,” she said. “We'll see more of those pension transfers, but [we’ll also see] companies realigning their goals and looking at how to ensure that they’re well positioned for the long term.”