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Change and Growth for DB Finances in ’21, Says Report

Practice Management

The year 2021 served up plenty of changes and challenges, and private-sector pension plans were not immune—but there also was good news for them, says a recently released report. 

In fact, says Willis Towers Watson (WTW), the changes and positive developments that pension plans experienced were related. 

Funded Status

Improvement in funded status is not new, says WTW—it has been improving for five years. But the changes in ’21 were noteworthy, they report. 

Average funded status started 2021 at 89.3%; at the end of the year, it was almost 8 percentage points higher at 97.2%. But in 2021, there was more to the improvement than just that. WTW also says that in 2021, the number of companies in the firm’s Pension 100 with 100% funded status more than doubled from 15 to 35, and the number of companies with less than 80% funded status was cut by more than half in 2021 from 24 to 10. 

The 2021 WTW Pension 100 consists of sponsors of the largest U.S. pension programs among U.S. publicly traded organizations, ranked by projected benefit obligations at year-end 2020. 

Winds of Change

The improvements in funded status are in part the result of—and reflect—changes that took place in 2021, says the report. 

Equities. WTW reports that among the companies they studied, roughly one-third reduced their target equity allocation by 5 percentage points or more; their average funded status increased from 92% to 99%. These allocations, they say, “likely reflect” higher funding levels. 

Shift from public equities to fixed-income and alternative assets. WTW says that since 2009, the average target allocation to public equities has fallen by almost 21 percentage points; at the same time, target allocations to fixed-income investments as gone up buy almost as much, approximately 18 percentage points. The report says that this trend reflects growing interest in hedging funded status and reducing market risk exposure. 

Discount rates. Discount rates have been on a bit of a rollercoaster since 2008, WTW indicates; they say that they fell from 2008 to 2012, then rose in 2013, fluctuated between then and 2018, fell and 2019 and 2020, but rose in 2021. And that increase, they say, “played a primary role” in forcing plan obligations down in 2021.