A recent report suggests that the nation's largest defined benefit (DB) pension plans in the U.S. have achieved a remarkable turnaround, marking the first time since the 2008 financial crisis that their liabilities are fully funded. According to a Willis Towers Watson (WTW) analysis of the Fortune 1000 companies sponsoring DB pension plans, the aggregate funding status reached 100% by the end of 2023, a notable increase from 98% in 2022 and a substantial recovery from the 77% recorded in 2008.
Joanie Roberts, Senior Director of Retirement at WTW, attributes this success to the companies' robust financial management strategies, which involved effectively hedging assets with liabilities. Despite interest rate volatility in 2023, pension plan-funded status remained strong, demonstrating the resilience of these strategies.
The positive funding news is primarily attributed to strong market performance throughout 2023. Roberts highlighted the influence of gains in the equities market, particularly in large-cap equities, which offset challenges posed by lower bond rates. Domestic large capitalization equities experienced a 26% increase, while domestic small/mid-capitalization equities rose by 17%. Aggregate bonds reported gains of 6%, with long corporate and long government bonds—commonly used in liability-driven investing—recording gains of 11% and 3%, respectively.
Although pension plan assets declined by 1% in 2023, reaching $1.19 trillion, this decrease is attributed to active pension risk transfers and lower cash contributions compared to historical years. An estimated average investment return of 10.4% for the year counteracted the decline in asset prices.
While achieving full funding status is a positive development, companies remain mindful of other financial considerations. Joanie Roberts notes that companies are conscious of the impact on their profit and loss (P&L) costs and anticipate future contributions that may be required.
Looking ahead, Roberts provides insights into mitigating the risks associated with DB pension plans in 2024. She recommends that plan sponsors revisit their pension strategy, considering the potential benefits of having a pension surplus. Some companies may choose to accelerate future cash contributions, while others with well-funded plans might leverage the surplus to reduce risk or finance additional retirement benefits for employees. The increased funded status is indeed welcome news, but the focus remains on optimizing financial strategies to ensure long-term pension health.
