Dive Brief:

• The funded status of the largest corporate defined-benefit pension plans in the U.S. ended 2022 at the same level as they began the year, as weak investment returns offset lower pension liabilities created by higher interest rates, according to WTW, a global advisory company.
• A recent analysis found that the closely-watched funding deficit is projected to be $62 billion at the end of 2022, down from $80 billion at the end of 2021. Pension obligations, meanwhile, declined 26 percent from $1.73 trillion at the end of 2021 to an estimated $1.28 trillion at the end of 2022. 
• Higher interest rates allowed the funded status of the pension plans to overcome weak investment results and hold steady in 2022. That is good news for CFOs who must account for looming obligations to retirees. “It was a wild year,” said Jason Wilhite, senior director, retirement, with WTW, in an interview. “It’s certainly historic in some sense.”

Dive Insight:

Retirement plans — whether they be 401(k)s or more traditional pension plans that have been less common in recent years —  are a key attraction and retention tool that also carries costs that CFOs must keep an eye on. 

While WTW found that the funding status on balance sheets was largely unchanged last year, the relief could be short-lived because some sponsors face higher pension costs this year. “Sponsors will want to revisit how their strategy for managing pension risk needs to evolve,” said Joanie Roberts, senior director, retirement at WTW. In addition, company resources to fund retirement plans are set to be scarcer this year due to inflation, CFO Dive previously reported. 

Pensions were once a popular benefit for employees that enabled workers to plan for retirement. But they’ve fallen out of favor due to them being volatile for companies and financially impractical over the long term. 

As a result, most people entering the workforce today won’t be offered a pension. Even so, companies continue working to manage their existing pension liabilities, and escape them if they can. While paying lump sums to former employees was once popular, retiree annuity placements are now more in favor, Wilhite said.

This year companies should be “vigilant about assessing their pension risk and what could happen depending on external factors,” Wilhite said.

Looking ahead, interest rate P&L costs on the liabilities will increase for many plan sponsors and, as wages increase, pension costs will rise for pay-related pension plans, Wilhite said. 

WTW’s findings are based on an examination of the state of 356 Fortune 1000 companies that sponsor U.S. defined benefit pension plans that have a December fiscal year-end date.