The coronavirus pandemic is taking a dramatic toll on defined benefit funding levels. Data from Willis Towers Watson on 376 Fortune 1000 firms with defined benefit plans shows their aggregate funded status dropped from 87 percent to 79 percent in the first quarter, largely due to the pandemic’s impact on equity markets.
Funding deficit: The funding deficit increased $136 billion, a nearly 60 percent increase, from $229 billion to $365 billion among the plans analyzed by WTW.
Plan assets: Plan assets dropped more than $100 billion, from $1.52 trillion to $1.4 trillion. Investment returns dropped 7 percent—the first half of the quarter saw record highs in equity markets, while the most ravenous impacts of the Covid-19 pandemic were not felt until the end of February and into March.
Domestic large-cap equities: Domestic large-cap equities lost 20 percent. Small and mid-cap equities shed 30 percent.
Fixed-income performance: Fixed-income performance varied widely. Long-term corporate bonds, which are used in liability-driven investment strategies to pair a plan’s risk to liabilities, lost 5 percent. Long-term Treasuries gained 21 percent. All told, U.S. aggregate bonds saw 3 percent gains.
Despite the losses seen in long-term corporate debt, plans that have adopted LDI strategies—with less equity exposure—saw limited damage to funding levels, said Richard McEvoy, head of WTW’s U.S. Delegated Integrated Solutions team.
“The fallout from a volatile first quarter was not uniform across plan sponsors,” said McEvoy in a release. “Liability-driven investment strategies limited the damage to funding levels in many cases. A key element was how plan sponsors allocated between treasuries and credit. Overall, we saw significant variations of outcomes, reflecting the wider variation in pension strategies taken today than in years past.”
Different funded levels by industry
Data from investment management firm Barrow Hanley shows the aggregate funded ratio of plans sponsored within the Russell 3000 fell nearly 11 percent from the beginning of the year through March, from 88.7 percent to 77.9 percent, the lowest level of funding since 2012.
Some industries fared better than others. Sponsors in different sectors of the economy have different incentives to fully fund plans, the firm noted in its report.
Solvency rules require banks to write down pension funding shortfalls against reported capital, incentivizing them to aggressively fund plans. The average funded ratio among banks was 94.6 percent.
Airlines have more lenient funding rules, according to Barrow Hanley’s report. Their funded levels were the lowest tracked, at 66.2 percent.
The Russell 3000 includes small and midsized sponsors along with large businesses.
In 2007, the groups’ aggregate funded level was 105.5 percent. At the end of 2008, it dropped to 79.3 percent, slightly better than its current 77.9 percent status.