(April 4, 2013) – For most of America's largest funds—anointed the $20 billion club by Russell for those surpassing the $20 billion liabilities threshold—the 2012 highway bill MAP-21 also granted them holidays from funding their pensions.
But last year the majority of club members proved they are not just leaders in size, but also ambition. According to research from Russell, which followed up on its report from last month, most of the 19 either made voluntary contributions or left the door open to that possibility. Judging by the contribution plans laid out in each company's annual report, aggregate funding inflows for 2013 should in fact surpass the blockbusting $28 billion contributed in 2012.
"Over the last few years, several members of the $20 billion club have challenged the status quo and taken aggressive steps toward managing their pension risk," wrote Justin Owens, an investment strategy analyst and author of the research paper. "While their approaches have varied in creativity and magnitude, most have taken some action to proactively address their defined benefit funding challenges."
Perhaps the most unusual strategy utilized by club members to bankroll pension liabilities was the issuance of long-term bonds. Ford and UPS took the lead with this approach, which takes advantage of low corporate discount rates to borrow cheaply for the duration of the debt. The proceeds on these bonds flowed directly into corporate defined benefit (DB) pension offers.
"For the first time, benefit payments, which reduce liabilities, are expected to exceed service and interest cost, which increase liabilities," Owens wrote. "You couple this with ongoing risk transfers and possibly higher interest rates, the peak of DB plan liabilities may very well be behind us."
As total pension liabilities for the group reached new heights last year, their collective funding shortfall climbed to a record high along with it. When those shortfall figures were released, however, Russell's Chief Research Strategist Bob Collie told aiCIO they ought to be taken with a grain of salt.
"The surprising part of it is that we track funded status throughout the year and didn't expect a major change," Collie said. "Yet when the number came in, we saw this fairly significant drop." He cautioned against taking the rise in unfunded obligations too seriously, however: "It's just sort of this technical thing. It washes out over the long term."
It may not take a very long time. Owens' follow-up study indicates that 2013 could finally be the year liabilities—funded and otherwise—quit climbing.
Related article: The Hottest Club Around: The Pension World's $20B Club