Despite ongoing economic uncertainty, the nation’s largest corporate defined benefit pension plans ended 2022 essentially at the same funded levels as they began the year—but, experts say, HR and benefits leaders still need to pay close attention to market changes as we head into 2023.
That’s according to global advisory, broking and solutions company WTW, which examined pension plan data for more than 350 Fortune 1000 companies that sponsor U.S. defined benefit pension plans.
The main reason for the steady funding levels, according to WTW, is that weak investment returns offset lower pension liabilities created by higher interest rates.
The aggregate pension-funded status of these plans at the end of 2022 was estimated to be 95%, the same level as at the end of 2021. The analysis also found the funding deficit was projected to be $62 billion at the end of 2022, down from $80 billion at the end of 2021. Pension obligations declined 26% from $1.73 trillion at the end of 2021 to an estimated $1.28 trillion at the end of 2022.
“Corporate pension plans’ 10-year march toward full funding lost momentum in 2022,” says Jason Wilhite, senior director, Retirement, WTW. “Despite asset performance being down during 2022, the historic rise in interest rates also lowered pension liabilities, resulting in no change in funded status for U.S. corporate pension plans as a whole.”
Wilhite adds that, while funded status on companies’ balance sheets may be largely unchanged, some sponsors may face higher pension costs heading into 2023 due to the interest rate environment.
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The WTW analysis found pension plan assets declined 26% in 2022, finishing the year at $1.22 trillion. Overall investment returns are estimated to have averaged 19% in 2022, although returns varied significantly by asset class.
Joanie Roberts, also a senior director, Retirement, for WTW, says the firm believes plan sponsors should “stay vigilant” in 2023, as volatility and downside risk remain.
“The decline in asset values during 2022 may have increased the risk of future pension contributions for many plan sponsors,” she says. “With some economists forecasting a potential recession in 2023, sponsors will want to revisit how their strategy for managing pension risk needs to evolve.”
Roberts explains that the change in funded status during 2023 for individual plans will vary based on a number of factors, including their investment asset allocation and interest rate hedging strategy, cash contributions, any settlement activity such as lump sums or annuity purchases, and any effect of changes to the future costs for providing benefits that reflect a higher interest rate/inflation environment.
“All plan sponsors, including those currently with a strong funded position, should review their strategy for managing pension risks during 2023, considering the integration of both assets and liabilities,” she says. “Plan sponsors should consider how variables such as the plan’s funding level, inflation and capital market volatility may affect their risk-management strategies in the short- and long-term.”
All are also playing critical roles in retirement planning. For instance, a recent report from Goldman Sachs pointed to a “financial vortex”—fueled by the pandemic, market volatility, recession fears and soaring inflation—that is keeping employees from investing in retirement contributions. That challenge, however, is presenting employers with an opportunity to expand discussions around financial wellness.
“Employees are looking to their employers to provide support as conversations around financial wellbeing continue to gain traction,” Brian McDonald, head of Morgan Stanley at Work, recently told HRE.
Financial wellness will be a central topic at the upcoming Health & Benefits Leadership Conference, May 3-5 in Las Vegas. For instance, in a session entitled Retirement Strategies for the Workforce of the Future, John Lowell, a partner and consulting actuary with October Three Consulting LLC, will discuss the external factors fueling these retirement struggles, and how HR and benefits leaders can respond.
Lowell’s session will dive into recent research on retirement savings, including how critical such benefits are to employees—even more so than other elements of total rewards, and offer new retirement program designs to help organizations stand out as an employer of choice while keeping costs at a manageable level.
