Defined benefit (DB) plans sponsored by Fortune 1000 companies started 2022 in their strongest funded position since the 2008 global financial crisis at 96.5%. Over the past 13 years, plan sponsors have moved to de-risk DB investment portfolios by adopting liability-driven investment strategies and diversifying sources of investment returns beyond public equities by leveraging asset classes such as private equity and real assets. The capital market environment in 2022, including inflationary pressures and increasing interest rates, resulted in declining asset values due to double-digit losses for both public equity and fixed-income asset classes; however, higher interest rates also resulted in lower pension liabilities and left these plans with an aggregate funded position of 99.7% at the end of 2022.
Our study examines actual plan asset allocations at the beginning of 2023, but it’s worth noting that sponsors are actively evaluating their asset allocation strategies in light of the effects of higher interest rates and lower asset values. As of November 2023, the market landscape has been fairly positive with returns well on positive ground, while interest rates continue at levels not seen since 2008. Based on 2022 experience, plan funded position is likely to still be faring well, but sponsors will need to continue to assess their asset allocation strategies to adapt to the changing environment.
WTW’s analysis of 2022 fiscal year-end DB plan asset allocations first takes a detailed look at 429 Fortune 1000 plan sponsors’ actual asset holdings at the end of year.[1]
Figure 1a summarizes aggregate asset allocations weighted by the value of the sponsor’s plan assets and shows total-dollar allocations. As of year-end 2022, the companies in this analysis held more than $1.5 trillion in pension assets, comprising cash, public equity, debt and alternative investments (real estate, private equity, hedge funds and other).
At year-end 2022, 25.6% of pension assets, in aggregate, were allocated to public equity and 52.5% were allocated to debt, with the remaining assets spread among the other various categories.
Figure 1b depicts average asset allocations (not weighted by plan assets) for the same sample of companies. The average Fortune 1000 pension plan sponsors in the analysis held on average above $3.6 billion in assets at year-end 2022.
The average allocation to public equity was 30.3%, while the average debt allocation was 54.8%. As for alternative assets — real estate, private equity, hedge funds and other investments — allocations averaged 11.1% (compared with aggregate allocations of 18.9%). The difference between the aggregate and the average reflects differences in plan size: Larger plans were more inclined than smaller plans to invest in private equity and other alternatives instead of public equities.
Notes: Cash includes cash equivalents and money market instruments; debt includes insurance contracts, and hedge fund assets include derivatives and interest rate swaps.
Source: WTW
Notes: Cash includes cash equivalents and money market instruments; debt includes insurance contracts, and hedge fund assets include derivatives and interest rate swaps.
Source: WTW
When we considered allocations in real estate, hedge funds and private equity combined as alternative investments, we found that 67% of sponsors in this analysis held alternative assets in their DB plan asset allocation mix. The portion allocated within the different types of alternatives varied by asset class, with private equity’s share at 42.3%, hedge funds accounting for 29.0% and real estate 28.7% (Figure 2a). In 2022, half of sponsors that held alternative assets held allocations of more than 10% of their assets in these types of investments (Figure 2b).
Source: WTW
Note: For those plans that hold alternatives (67% of sponsors)
Source: WTW
Looking into a consistent sample of 406 plan sponsors, between the end of 2021 and the end of 2022, average allocation to public equity declined by 3.8%, while average debt holdings experienced an increase of 1.8% over the period. In addition, the average allocation to alternative assets increased by 1.4%. Some of these differences may be a result of relative asset performance during 2022, as there were sizeable differences in returns among public equities, fixed-income and alternative strategies.
Almost 56% of plan sponsors showed an increase in their average allocations to debt, with 11% of sponsors showing increases of more than 10% of their holdings. On the other hand, only 2% of sponsors realized an increase in their equity holdings over more than 10% (Figure 3). These recent allocations to debt holdings most likely reflect higher funding levels triggering or accelerating de-risking strategies, such as glide paths, which reduce equity exposure as the plan moves closer to full funding.
| Change magnitude | Equity allocations | Debt allocations | ||
|---|---|---|---|---|
| % of sponsors realizing a change in their equity allocations | Average change realized in equity allocations | % of sponsors realizing a change in their debt allocations | Average change realized in debt allocations | |
| An increase of 10% or more | 2.2% | 19.7% | 10.8% | 21.7% |
| 5% – 9.9% increase | 2.7% | 7.0% | 11.6% | 7.5% |
| 0.1% – 4.9% increase | 23.2% | 1.5% | 33.5% | 1.9% |
| No change | 2.0% | 0.0% | 0.2% | 0.0% |
| 0.1% – 4.9% decrease | 40.6% | –2.3% | 34.0% | –1.9% |
| 5% – 9.9% decrease | 15.8% | –7.5% | 5.9% | –7.2% |
| A decrease of 10% or more | 13.5% | –19.8% | 3.9% | –24.8% |
Note: For those with allocations to debt and equity
Source: WTW
Aggregate and average asset allocations for smaller, midsize and larger plan sponsors are shown in figures 4a and 4b. The analysis divides these sponsors into three groups by total pension assets: Smaller plan sponsors (143 companies) held assets of less than $464 million; midsize plan sponsors (143 companies) held between $464 million and $1.9 billion, and larger plan sponsors (143 companies) held more than $1.9 billion in assets. The largest sponsor held pension assets worth nearly $59.7 billion. Weighting smaller, midsize and larger sponsors by plan assets emphasizes the large share of pension assets held by very large plans[2] as well as the pronounced differences in investing behavior between smaller and larger plans (Figure 4a).
Notes: Cash includes cash equivalents and money market instruments; debt includes insurance contracts, and hedge fund assets include derivatives and interest rate swaps.
Source: WTW
Notes: Cash includes cash equivalents and money market instruments; debt includes insurance contracts, and hedge fund assets include derivatives and interest rate swaps.
Source: WTW
Typically, the larger the plan, the lower the allocation to public equity, which averaged 28.4% for larger plans versus 33.3% for smaller plans (Figure 4b). Larger plans are more likely to turn to diversifying alternative assets to support return needs. On average, these plans allocated more than three times as much as smaller plans to other return-seeking investments (13.5% versus 3.4%), which might reflect larger plans’ access to economies of scale and in-house investment structures that enable them to manage alternative assets effectively.
For this part of the analysis, we divided plan sponsors into three mutually exclusive categories by the current status of their primary U.S. pension plan: open, closed to new hires or frozen. Open DB plans are those still offered to newly hired employees, while closed plans stopped being offered to new hires after a fixed date. In frozen plans, benefit accruals have ceased for plan participants. More than three-quarters of the companies in our analysis sponsored either a closed or a frozen pension plan, while the remaining still offered an open plan.
Figures 5a and 5b show asset allocations by plan status and demonstrate a relationship between the plan’s current status and the portfolio’s risk profile, with the correlation strongest on an aggregate basis (Figure 5a). In order to maintain a funded position, plan assets must generate returns to meet both interest on liabilities and the cost of benefits earned by employees. Frozen pensions held more debt investments compared with plans — either open or closed — in which workers were still actively accruing pensions. In aggregate, sponsors of frozen plans held almost 59.8% of their assets in debt and cash versus 48.7% for sponsors of open plans, reflecting the higher return needs for plans where employees still earn additional benefits.
Notes: Cash includes cash equivalents and money market instruments; debt includes insurance contracts, and hedge fund assets include derivatives and interest rate swaps.
Source: WTW
Notes: Cash includes cash equivalents and money market instruments; debt includes insurance contracts, and hedge fund assets include derivatives and interest rate swaps.
Source: WTW
Although plan sponsors faced negative equity market performance, funding levels stayed afloat and, for many sponsors, increased due to the steep rise in discount rates (which reduces obligations and pension deficits). Overall, the effect of discount rate increases more than compensated the slump in the equity markets, continuing the funded status improvements seen over the past five years.[3]
Our 2022 analysis shows a correlation between funded status at year-end and asset allocations (Figure 6a). As sponsors get closer to full funding levels, their portfolios tend to become more conservative in nature, typically as a result of investment de-risking strategies such as liability-driven investment (LDI) and asset glide paths.[4] Similar to prior years, average fixed-income holdings surpassed equity investments across all funding levels, demonstrating sponsors’ continuous efforts toward de-risking.
| Asset class | Funded status | ||||
|---|---|---|---|---|---|
| Less than 80% | 80% – 89% | 90% – 99% | 100% - 109.9% | 110% or more | |
| Cash | 3.7% | 3.0% | 3.2% | 4.2% | 5.4% |
| Debt | 50.9% | 52.7% | 58.6% | 62.8% | 46.4% |
| Equity | 37.1% | 32.6% | 25.4% | 25.2% | 34.4% |
| Hedge funds | 1.6% | 3.2% | 3.6% | 1.1% | 3.0% |
| Other | 2.7% | 3.1% | 2.6% | 2.0% | 3.1% |
| Private equity | 1.5% | 2.2% | 3.6% | 2.2% | 4.5% |
| Real estate | 2.5% | 3.2% | 3.0% | 2.5% | 3.2% |
| N | 67 | 92 | 116 | 79 | 75 |
Notes: Cash includes cash equivalents and money market instruments; debt includes insurance contracts, and hedge fund assets include derivatives and interest rate swaps.
Source: WTW
Overall, plans tend to become more risk averse as their funded status nears full funding; however, the lower allocation to debt for those with a funding level higher than 110% reflects a higher prevalence of open plans in that grouping, which as previously discussed tend to hold a higher percentage of growth assets compared with their frozen and closed peers. While the samples above are generally composed of about 50% of frozen plans, in the “110% or more” category, only 33% of the plans are frozen. Figure 6b depicts the relationship between higher allocations to debt as the plan’s funded status improves, separated by benefit accrual rate.[5] Well-funded plans with lower benefit accrual rates are typically associated with higher allocations to fixed-income assets, while higher accrual rates (reflecting active pensions) correspond with higher allocations to return-seeking assets. Interestingly, even after accounting for benefit accrual rates, plans that are over 110% funded still show higher allocations to return-seeking assets than similar peers — perhaps suggesting that those sponsors have a higher tolerance for risk given the stronger funded position of the plans.
| Accrual rate** | Funded status* | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Less than 80% | 80% – 89% | 90% – 99% | 100% or more | 110% or more | ||||||
| N | Debt % | N | Debt % | N | Debt % | N | Debt % | N | Debt % | |
| Less than 0.5% | 13 | 51.0% | 29 | 49.0% | 33 | 67.8% | 36 | 72.0% | 18 | 61.1% |
| 0.5% – 1.9% | 18 | 56.7% | 34 | 56.1% | 43 | 59.7% | 19 | 63.5% | 21 | 47.1% |
| 2.0% – 2.9% | 13 | 52.3% | 13 | 50.3% | 21 | 54.9% | 10 | 53.9% | 12 | 44.2% |
| 3.0% or more | 22 | 46.5% | 16 | 54.3% | 18 | 43.4% | 14 | 44.4% | 23 | 36.0% |
| N | 66 | 92 | 115 | 79 | 74 | |||||
*A sponsor’s funded status is determined by the sum of all its pension assets divided by its pension liabilities on a global level.
**Accrual rate is defined as the ratio of service cost over end-of-year PBO.
Source: WTW
Roughly 8% of Fortune 1000 DB plan sponsors held company securities as pension assets in 2022. These allocations averaged 6.3% of pension assets in 2022 (4.3% when weighted by end-of-year plan assets). The weighted average is lower than the simple average because larger plans allocated lower percentages to company securities than did smaller plans.
In 2022, for those that held company securities, 57% held less than 4% of pension assets in company securities, while 23% held more than 10% of pension assets in these funds (Figure 7).[6]
Source: WTW
We next track asset allocation trends from the start of our studies in 2009, based on a consistent sample of 175 pension sponsors that have been in the Fortune 1000 over the past 13 years. Figure 8 shows asset allocations for these companies on an aggregate basis for 2009, 2012, 2015, 2018, 2021 and 2022.
Source: WTW
The shift from equities to fixed-income investments has been consistent throughout the period. Since 2009, aggregate allocations to public equities declined by 19.9 percentage points, while allocations to fixed-income increased by 15.1%.
Between 2009 and 2022, among a consistent sample of 175 sponsors, the portion of plans whose pensions held 50% or more in cash and fixed-income assets more than tripled, rising from 17% to 62% (Figure 9). The variation in investment allocation strategies has increased over the past decade. By the end of 2022, three out of 10 plan sponsors held more than 70% of their assets in fixed-income (a total of 55 sponsors), up from only 3% in 2009 (totaling six sponsors).
Source: WTW
The analysis shows a clear de-risking trend, with plan sponsors focusing more on hedging liabilities and less on generating higher returns. Many sponsors have complemented investment de-risking via asset allocation strategies with other liability-reduction strategies, such as offering lump sum buyouts, purchasing annuities and terminating their plans (although the latter remains fairly uncommon for large pension plans).
Overall plan assets declined during 2022 as both equity markets and fixed-income assets had negative overall returns. While losses on equities and fixed-income were unfavorable to plan funded position, the rise in interest rates reduced plan obligations, acting as counterweight to the decline in asset values. As the majority of plan sponsors are not fully hedged from interest rate risk, overall plan funded status improved during 2022 despite the asset headwinds.
Relative to immediately after the financial crisis, plan assets are invested much differently today, as nearly 60% of plan assets are allocated to liability hedging investments (debt and cash). Sponsors that manage frozen pension plans are further down the investment de-risking path, as many of these sponsors seek to reduce funded status volatility given the plans’ legacy status.
While the majority of pension plan assets are distributed among public equities and fixed-income securities, sponsors of larger plans continue to utilize alternative assets (such as private equity, hedge funds and real estate) to improve returns as well as to manage risk by providing diversification within their asset portfolio. These asset classes were particularly helpful diversifiers during 2022.
While 2022 had favorable results for plan funded status for many sponsors, challenges still remain for some, which will lead to continued action for the management of plan assets. Sponsors may explore changes to their return targets to meet hurdle rates or improve funded positions to manage the risk of future cash contribution requirements. Sponsors that find themselves well-funded may have more options — either the flexibility to maintain growth assets (and potentially DB benefits for employees) or exploring risk reduction strategies with plan investment allocation changes or risk transfers (such as purchasing annuities or executing plan terminations). As evidenced by the variation in asset allocation strategies seen today, the appropriate strategy will differ by plan sponsor depending on the capital market conditions and each plan sponsor’s objectives and risk tolerance for the plan.
The Financial Accounting Standards Board began requiring more detailed pension asset disclosures in 2009. These analyses track asset allocation trends and patterns over time in Fortune 1000 plans. This 14th edition looks at fiscal year-end 2022 global pension allocations by asset class, such as cash, equity, debt and alternatives, as well as by a variety of other attributes of both the assets and the plans.
The analysis is performed on both an aggregate-sponsor (weighted by plan assets) and average-sponsor basis as well as by plan size, plan status (open, frozen or closed) and funded status (defined as the ratio between total fair value of assets over total liabilities on a global basis). We examine the prevalence and amount of pension assets invested in company securities. Finally, we compare asset holdings from 2009 through 2022 for a consistent sample of plan sponsors to examine how plan sponsors have modified their investment strategies over time.
| Title | File Type | File Size |
|---|---|---|
| 2022 asset allocations in Fortune 1000 pension plans | .4 MB |
