A Look at Funding Status and Asset Allocations

Funding in defined benefit plans can generally be at a higher level than in the past, but it’s been a bit of a yo-yo for an extended period of time. In times of volatility and uncertainty, argues an investment management firm, asset allocation takes on added importance – and it examines the link between funded status and how pension plan assets are allocated .

“The asset allocation strategy adopted by sponsors plays a crucial role in the investment returns, funded status and cash requirements of plans to cover items such as employer contributions” in the “difficult environment of exceptional uncertainty,” says Willis Towers Watson in “2020 Asset Allocations in Fortune 1000 Retirement Plans.” They examine asset allocations by plan size, status and funding among the Fortune 1000 in 2020, examining the links between risk reduction and allocations and monitoring trends.

The 2020 year-end DB plan asset allocation study includes a review of pension disclosures made by 451 Fortune 1000 plan sponsors. At the end of that year, these 451 companies collectively held more than 2 $.0 trillion in retirement assets, held in cash, public stocks, debt and alternative investments such as real estate, private equity and hedge funds, and average year-end assets among these plan sponsors was over $4.8 billion.

Climate instability (economic)

Setting the table, Willis Towers Watson notes that there have been “extraordinary levels of volatility and uncertainty” affecting financial markets in 2020, largely due to the pandemic. There were mixed signals and factors, they note, during the year: equity and debt markets recovered from the effects of the pandemic early in the year; however, lower interest rates partly offset portfolio gains due to asset growth, which, together with equity returns, led to a “tepid” improvement in pension plan funded levels. retirement.

This climate, says Willis Towers Watson, created a “challenging environment of exceptional uncertainty” in which asset allocation strategies were of critical importance to investment returns, funding status and hedging of employer contributions.

Funding status and allocations

Among the findings, the likelihood of holding investments in stocks, hedge funds and real estate increased as capitalization status decreased. Conversely, the likelihood that plan funds were invested in cash and debt increased as the level of funding increased.

Asset Allocation by Plan Funded Status

Asset class >70% 70%-79% 80%-80% 90%-99% +100%
Cash 2.4% 2.9% 2.6% 2.8% 5.9%
Debt 43.5% 43.1% 52.0% 53.9% 54.4%
Hedge funds 3.5% 3.5% 2.2% 1.9% 1.5%
Capital investment 1.5% 2.0% 1.9% 2.3% 1.6%
Immovable 2.4% 2.7% 2.3% 2.4% 1.2%

Additional factors and gauges

The study also examines additional measures of how the plan sponsors in the study allocated assets and treated investments.

Size matters. Willis Towers Watson found that the extent to which a plan allocates its portfolio to alternative investments is related to plan size. Namely: small schemes allocated 3.4%, while large schemes allocated almost 3 times more to alternative investments. Conversely, small plans were more likely to invest in public stocks.

Securities. In 2020, according to Willis Towers Watson, more than 8% of Fortune 1000 plan sponsors held retirement assets in the form of corporate securities. Of these plan sponsors, 5.5% of plan assets were attributable to them.

Public equity. At the end of 2020, the 451 Fortune 1000 companies allocated 32.1% of retirement assets to public equities. The average allocation was 37%. Willis Towers Watson notes that the average allocation among a sample of 411 public equity plan sponsors in 2020 was the same as in 2019.

Debt. At the end of 2020, the 451 Fortune 1000 companies allocated 50.9% to debt. The average debt distribution was 49.7%.

Moreover, the study indicates that among a sample of 411 plan sponsors, for just over 3% of them, debt allowances decreased by more than 10% in 2020; the average decline was about 38%. Willis Towers Watson adds that for many of these companies this was the result of unloading some of their liabilities and rebalancing asset allocations to better match the profile of the remaining obligations.

Alternative assets. At the end of 2020, 69.2% of plan sponsors held at least some alternative assets. By asset class, these amount to:

  • private equity: 37.5%
  • hedge funds: 32.8%
  • real estate: 29.7%

Additionally, according to Willis Towers Watson, in 2020, approximately 40% of plan sponsors who held alternative assets allocated up to 5% of their assets to such investments; far fewer, 4.2%, of plan sponsors held more than 30% of their assets in alternative assets.

In total, the 451 Fortune 1000 companies allocated 14.1% to alternative investments. The average allocation to alternative assets (real estate, private equity, hedge funds and other investments) was 9.7%.

Frozen or thawed. According to the study, whether a plan is frozen or not can indicate the degree of risk in its portfolio. Willis Towers Watson found that frozen plans held more liability-covering investments than both closed and open plans; more than half of the frozen plans held debt assets, while less than half of the open plans did. “There is a strong correlation between the status of a pension plan and the risk profile of its portfolio,” they conclude.

Longer term trends

The 2020 results are more than a symptom of the pandemic, according to the report, they are also part of longer-term trends. Since 2009, observes Willis Towers Watson, there have been two clear and constant trends:

  • Move from stocks to low volatility investments. For example, they cite average allocations to public equities, which fell about 14 percentage points over this period.
  • Debt allocations increased by nearly 16% over the 2009-2020 period.

In addition, according to Willis Towers Watson, plan sponsors are increasingly looking for alternative investment returns. In 2009, they say, 6.7% of returns came from this source in 2009, and 7.8% in 2020. And, they say, during that time, the number of plan sponsors who held more than half of their assets in fixed income securities tripled.

James V. Hayes