The funding shortfall bedeviling the 100 largest U.S. corporate pension funds rose for a second straight year in 2012, as a strong stock market and hefty plan contributions failed to offset damage done by persistently low interest rates, according to an analysis by Towers Watson released on Monday.
The gap between what these corporations, all publicly traded, will owe retired workers and how much they have put aside jumped 17%, from $252.7 billion at year-end 2011 to $295.2 billion at year-end 2012. By comparison, these companies had a pension surplus of $86 billion in 2007.
Companies are required to calculate the present value of the future pension liabilities by using a so-called discount rate, based on corporate bond yields. As those rates fall, the liabilities rise.
An unprecedented level of lump sum buyouts and annuity purchases partially offset the increases in both assets and liabilities - due to lower interest rates. Without the buyouts and annuity purchases, obligations would have increased by 12%.
Since the 2008 financial crisis, corporate pension plan assets have increased, owing to the double-digit gains in stock markets and large contributions. The Standard & Poor's 500 Index climbed more than 13% in 2012.
"However, four consecutive years of declining interest rates pushed liabilities 40% higher, leaving companies with larger deficits than before," said Alan Glickstein, a senior consultant at Towers Watson.
According to the Towers analysis, employers contributed $45.1 billion to their pension plans in 2012. That is a 16% increase from 2011 and the largest contribution employers have made in the past five years. The analysis noted that the companies contributed more than twice the amount of benefits accrued last year to keep funding levels up.
Over the last few years many corporations have been gradually adjusting their portfolios to reduce investment risk relative to liabilities, shifting from public equities to fixed-income and alternative investments.
Since 2009, average allocations to equities have fallen 10 percentage points, while allocations to fixed-income investments have risen by eight percentage points. However, the shift away from equities slowed in 2012, according to the report.
"Of the 95 companies that reported target asset allocation strategies for 2012 and 2013, only three reduced their target equity allocations by 10% or more, versus 16 for 2011," Towers Watson's report said.
"Obviously, there is a long way to go until the end of the year, but funding ratios are moving in the right direction," said Dave Suchsland, a senior consultant at Towers Watson.
"If interest rates don't continue their rise and equity returns weaken, plan sponsors may need to pour more cash into their plans to improve funded status for the full year."