Market plunge chops pension funding by 9%

The sell-off in response to the pandemic has hit some industries' pensions plans, such as airlines', harder than others, two reports suggest

Corporate pensions have taken a hit from this year’s market drop, with the average funding ratio falling by more than 9% since the end of 2019, according to reports issued this week by Willis Towers Watson and Barrow Hanley.

Both companies found that at the end of the first quarter, corporate pension funding ratios were at their lowest level since 2012, when they averaged about 77%. The average for the end of March was 79%, down eight percentage points from 87% at the end of 2019.

“The driver of it really was how your plan was invested,” said Royce Kosoff, managing director at Willis Towers Watson. Because of the “really wide range of returns across asset classes, as a result, where the plan sponsor was invested is going to be a key driver in how their plan held up,” he said.

As of March 31, the total pension deficit among corporate pension plans tracked by Willis Towers Watson stood at an estimated $365 billion, up 59% from $229 billion at the end of 2019, according to the report.

Pension obligations, meanwhile, went from $1.75 trillion at the end of last year to $1.76 trillion at the end of the first quarter. Total corporate pension plan assets in the U.S. fell by about 8% during the quarter, going from $1.52 trillion to $1.4 trillion, the report stated.

Some industries and companies are more affected than others. In sectors like financial services, where funding ratios are relatively high, many plans have de-risked their assets, moving into more stable investments than stocks. But in other industries with lower average funding levels, plans are more likely to hold riskier assets for the purpose of seeking higher returns that could shore up deficits.

“The airlines right now, many of which still have pensions, are struggling,” Kosoff said. “They have a lower funded status, which requires higher contribution status.”

Airline industry pension plans had an average funding ratio of just over 66% at the end of the first quarter, according to the report from Barrow Hanley. That is considerably lower than the category average of 76% for industrials, the report noted.

By comparison, the financial services sector has an average funded ratio of 87%, while banks specifically have an average level of nearly 95%, according to Barrow Hanley.

Across all industries, average funded ratios can vary significantly from year to year. In 2007, for example, the average was above 105%, though it dropped to 79% in 2008 before recovering to nearly 84% in 2010, Barrow Hanley reported.

As part of the recently passed Care s Act, some companies will be eligible to defer pension plan contributions this year.

The silver lining, Kosoff said, is that lower funded ratios do not affect people who are currently receiving payments. By comparison, the stock market drop and low interest-rate environment can have a much bigger effect on near retirees whose assets are invested primarily in defined-contribution plans, he noted.

“The near-term effect for [pension plan] participants is not really the problem here,” Kosoff said. “Even if we see a funded status drop, these plans are generally solvent to make many years of payments.”