The largest employer contributions to pension plans in five years weren’t enough to cover defined benefit liabilities in 2012, according to research released this morning by Towers Watson. An analysis of the 100 largest U.S. pension sponsors finds that their collective funding status fell for the second consecutive year.

Towers Watson reports that employers contributed $45.1 billion to their pension plans last year, up from $38.9 billion in 2011. Companies contributed more than twice the amount of benefits accrued last year in order to keep funding levels up, but it wasn’t enough: pension deficits jumped 17%, or $42.5 billion, to $295.2 billion at year-end 2012.

The average funding ratio declined to 77%, a two-point drop, from the end of 2011 to the same time last year. Plan assets increased 6%; liabilities grew 8%. The TW analysis cited falling interest rates as the primary reason for record-high liabilities.

“Buoyed by the stock market and large contributions, employers have rebuilt their pension plan assets to a point before the 2008 market collapse,” says Alan Glickstein, a senior consultant at Towers Watson. “However, that has been more than offset by growth in liabilities. Four consecutive years of declining interest rates have helped push liabilities 40% higher and left companies with even larger deficits than before.”

In 2007, over half of the largest U.S. pension sponsors had fully funded plans; only five out of the 100 did in 2012. The average discount rate was 4.01% in 2012, TW reports, down from 4.79% in 2011 and 5.46% in 2010.

A strong equities market in the first quarter and an approximately 20 basis point-increase in interest rates have seen 2013 off to a good start, says Dave Suchsland, also a senior TW consultant.

“Obviously, there is a long way to go until the end of the year, but funding ratios are moving in the right direction,” Suchsland says. “If interest rates don’t continue their rise and equity returns weaken, plan sponsors may need to pour more cash into their plans to improve funded status for the full year,”

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