Financial Health of Top Corporate Pension Plans Improved in 2009, Towers Watson Analysis Finds

WASHINGTON, April 7 /PRNewswire-FirstCall/ -- The financial health of the nation's 100 largest corporate pension plans improved modestly in 2009, largely due to strong stock market returns, although higher liabilities caused by lower discount rates tempered the overall improvement, according to a new analysis by Towers Watson (NYSE, Nasdaq: TW), a global professional services company. In the first look at actual year-end disclosures, the analysis found that 2009 funding levels and overall pension plan assets increased over 2008 levels, although funding for both years remained well below 2007 levels.

The Towers Watson analysis of year-end corporate disclosures for the 100 largest U.S. plan sponsors* found that aggregate funding for their U.S. pensions increased by $26.1 billion last year, shrinking a $209.6 billion deficit at year-end 2008 to a $183.5 billion deficit at year-end 2009. By comparison, these firms had a pension surplus of $93 billion in 2007. The overall aggregate funding ratio increased by four percentage points, from 78% funded at the end of 2008 to 82% funded at the end of 2009. Most plans were fully funded in 2007.

"Last year brought some much needed good news to pension plan sponsors as strong asset returns resulted in modest funding gains," said Alan Glickstein, senior consultant at Towers Watson. "However, employers are not out of the woods just yet. Overall pension deficits remain quite large, and employers will need to contribute significantly more into their plans over the next few years to return to full funding levels."

According to the analysis, aggregate pension contributions nearly doubled last year — from $15.6 billion in 2008 to $30.8 billion in 2009. However, companies are expecting to make smaller contributions in 2010, approximately $19.6 billion — roughly one-third less than 2009 contributions. For many employers, higher minimum required contributions aren't due until 2011 and 2012 because of regulatory and legislative relief granted in the past year.  

The analysis showed that pension plan assets increased by 12% in 2009, from $768 billion at the end of 2008 to $863 billion at the end of last year. This increase was largely due to significant gains in the equities market as well as cash contributions into the plans. In 2009, the average rate of return on plan investments was 18%, compared with an average return of minus 24% in 2008.  

Over the last year, most plan sponsors did not change their investment policy although some shifted to a liability-driven investment strategy to better manage their funded status, resulting in a slight shift away from equities. For the 85 companies that provided data, the average target equity allocation is 52.8% for 2010, compared with 55.1% for 2009.

"Pension plan sponsors will continue to evaluate their investment strategies in an attempt to further improve their funded position while protecting against another market downturn," said Mark Ruloff, senior consultant at Towers Watson. "Furthermore, we believe companies can alleviate some of their risks by adopting liability-driven investment strategies, which utilize matching assets — principally through bonds and the derivative markets — to better hedge their long-term pension liabilities."

Other findings from the analysis include:

• The percentage of companies with funding ratios lower than 70% fell significantly, from 41% at year-end 2008 to 17% in 2009. The percentage with funding ratios between 70% and 90% jumped from 45% at year-end 2008 to 69% in 2009.*
• The average discount rate at year-end 2009 was 5.92%, a decline from 6.38% in 2008 and 6.29% in 2007.  

For more information, read the Towers Watson Insider article, available here:

http://www.towerswatson.com/united-states/research/1488

Editor's note: The analysis was based on U.S. pension disclosures for the 100 largest pension plan sponsors among publicly traded companies with year-end 2009 fiscal dates, ranked by amount of plan liability at the end of 2008.

* The funding shortfalls shown here are based on financial accounting and differ from regulatory funding measures, thresholds and contribution requirements under the Pension Protection Act of 2006 and subsequent legislation and regulations.

About Towers Watson

Towers Watson (NYSE, Nasdaq: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at towerswatson.com.

SOURCE Towers Watson

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