A study by Towers Watson of trends in pensions and postretirement benefits in 2012 found that the funded ratio of the Fortune 1000 pension plans improved only slightly from the previous year to 74 percent and that 70 percent of companies had a funded status of less than 80 percent.
For its report, Towers Watson analyzed disclosures in the fiscal 2012 annual reports for Fortune 1000 companies with fiscal years ending October 1 through December 31. It compared data from 1999 through 2012, which showed a continuous downward trend in companies’ expected rate of return and the discount rates used to calculate pension benefits.
In 1999, the expected rate of return on investments was 9.18 percent, compared to 7.41 percent in 2012. The discount rate also decreased from 7.63 percent to 3.94 percent during the same time frame.
For fiscal year end 2012, the discount rate used to calculate the present value of pension obligations ranged from 2.7 percent to 5.5 percent, with the average value of the discount rate at 3.94 percent. In fiscal year 2011, the average discount rate was 4.68 percent.
The average return on plan investments for plan sponsors in 2012 was 12.33 percent compared to 3.32 percent in fiscal year end 2011.
Of the companies in the study that sponsor a retirement pension plan, 83 percent reported that they also offered postretirement medical benefits.
Thirty-seven percent of companies with postretirement medical benefits had assets associated with their postretirement benefit plans, Towers Watson found. For companies with assets supporting their postretirement benefit plan, the median level of assets as a percentage of accumulated postretirement benefit obligation was 40 percent at the end of 2012. In 2011, the median level of assets as a percentage of accumulated postretirement benefit obligation was 37 percent.
The average discount rate used to calculate postretirement benefits ranged from 1.75 percent to 5.44 percent in 2012, with an average of 3.82 percent. In 2011, the discount rate ranged from 3.3 percent to 6.3 percent, with an average value of 4.59 percent.
Sixteen percent of companies surveyed said they use the same discount rates to calculate both pension and postretirement assets.
Employers are required to accrue the cost of their postretirement benefits, like medical and life insurance benefits, over a period of years until the date employees become fully eligible for those benefits.