(March 3, 2014) — As US corporate pension plans improved their financial health last year, the industry can expect big strategic changes and a lightened contribution burden, according to a report by Russell Investments.
Russell’s “$20 billion club” includes 19 US corporations with worldwide pension liabilities surpassing $20 billion. Last year, the group shed more than $100 billion in deficits, thanks to bullish equity markets, rising interest rates, and increased sponsor contributions. The combined shortfall shrunk from $220 billion to $114 billion, the lowest since the financial crisis.
2013 was a critical year, said Bob Collie, Russell’s chief research strategist for the Americas institutional division.
After hitting “peak pension” in 2012—with liabilities the highest they would ever get—”America’s private sector defined benefit system is now officially shrinking,” according to Collie. As it falls, he said, the defined contribution system has progressed in the opposite direction.
Nearly $69 billion in liabilities fell away last year due to interest rate and actuarial assumption changes alone. The median discount rate used for valuation rose to 4.89%, for instance. Plan sponsor contributions were also exceptionally high for the club at roughly $27 billion—more than double the $12 billion added in 2008.
Russell’s model for a representative open pension plan finished the year strongly at 88% funded. The $20 billion club’s liabilities also fell to $841 billion from $915 billion while assets grew from $694 billion to $727 billion.
“All of those changes have increased the appetite of sponsors to run their plans differently than in the past: more liability-focused; less peer-sensitive; more risk-averse,” Collie wrote in a blog post.
Smaller deficits mean smaller contributions, Collie added. Plan sponsor contributions are expected to drop to $14.3 billion in 2014, according to the report.
Employers are also expected to lean more heavily on liability-driven investing strategies, showing greater efforts to de-risk and maintain their high funded ratios, the report stated. It’s already begun. For example, Ford has adopted “a broad global pension de-risking strategy” to achieve full funding and United Technologies’ has implemented an interest-rate hedge which dynamically increased as funded status improves.
Other members of the $20 billion club include AT&T, Bank of America, Boeing, Dow Chemical, E.I. DuPont de NeMours, Exxon Mobil, General Electric, General Motors, Hewlett-Packard, Honeywell, IBM, Lockheed Martin, Northrop Grumman, Pfizer, Raytheon, United Parcel Service, and Verizon.
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