Corporate Pension Funding Ratios Nearly Flat in 2019 Despite 17.3% Returns

Plunging discount rates offset second-largest investment return in 20 years.

Despite raking in investment returns of 17.3% in 2019, the funding ratio of the 100 largest US corporate pension plans rose only slightly for the year because of plummeting discount rates.

According to consulting and actuarial firm Milliman, the asset gains last year were the second highest in 20 years for the plans, behind only 2003’s investment return of 19.5%. However, the strong returns were nearly canceled out by a 94 basis point (bps) drop in discount rates to 3.06% from 4%. The falling rates raised pension liabilities and caused the overall pension funding ratio for the year to edge up slightly to 87.5% as of Dec. 31 from 87.1% at the end of 2018.

“Corporate pensions have experienced a lot of turbulence so far in 2020, and plan sponsor strategies in response to the recent economic stressors and the CARES [Coronavirus Aid, Relief, and Economic Security] Act are just beginning to take shape,” Zorast Wadia, co-author of Milliman’s Pension Funding Study, said in a statement. “Organizations that are considering deferring contributions this year should keep in mind the resulting impact on funded status, tax deductions, PBGC [Pension Benefit Guaranty Corporation] premiums, and pension expense.”

The $34 billion in contributions made by the sponsors of the plans in 2019 was lower than expected, according to Milliman, following two years of record high contributions of $61.8 billion and $59.5 billion for 2017 and 2018, respectively. Among the 100 companies sponsoring the plans, 13 contributed at least $1 billion in 2019 with the largest being made by United Parcel Service Inc., which made $2.1 billion in contributions last year. In 2018, six employers made larger contributions, with AT&T leading the way with $9.3 billion in contributions.

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The trend of plan sponsors implementing liability-driven investment strategies, which involve shifting more assets into fixed income, continued in 2019, according to the study, as equity allocations in the pension portfolios increased only slightly to an average of 32.5% during 2019 from 32.1% at the end of 2018.

The percentages of pension fund assets allocated to equities, fixed income, and other investments were 32.5%, 49.1%, and 18.4%, respectively, at the end of fiscal year 2019, compared with 32.1%, 48.0%, and 19.9%, respectively, at the end of fiscal year 2018. Unlike in 2018, when plans with fixed income allocations of more than 50% outperformed other plans, those plans underperformed in 2019.

Plan sponsors continued to execute pension risk transfers in 2019, led by GE, Lockheed Martin, PepsiCo, and Ford, which reported total transactions of $2.7 billion, $1.9 billion, $1.3 billion, and $1.3 billion, respectively. However, the pension risk transfer market was down from the record high in 2018 as Milliman estimated that there were $13.5 billion in risk transfers in fiscal year 2019 compared with $18.8 billion the previous year. 

The transfers continued to be spurred by rising PBGC premiums, according to the study. PBGC flat dollar premiums increased to $80 in 2019 from $74 in 2018, while the variable rate premium increased to 4.3% of a pension plan’s PBGC funded status deficit in 2019, from 3.8% in 2018.

The results of the Milliman 2020 Pension Funding Study are based on the pension plan accounting information disclosed in the footnotes to the companies’ 10-K annual reports for the 2019 fiscal year and for previous fiscal years.

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University of Texas Endowment Oil Money In Jeopardy

Top official of university organization that manages mineral rights for the endowment calls for Texas oil production cuts.

The CEO of University Lands is asking state regulators to order Texas oil producers to cut production by 20% in an effort to help save the cash cow that has made the University of Texas endowment the second biggest in the United States.

Declining oil prices are threatening the oil revenue so much that University Lands only expects to send $700 million to the Permanent University Fund this fiscal year, down from $1 billion last year. By 2021, revenue to the permanent fund could drop to $500 million if oil prices don’t move significantly, University Lands estimates show.

“I believe it is imperative that every effort be made to ensure the viability of oil and gas operators and oilfield service companies as their existence is imperative to sustained oil and gas development,” said Mark Houser, CEO of University Lands in testimony to the Railroad Commission of Texas.

The three-member commission, which regulates oil and gas companies in Texas, is scheduled to decide on May 5 whether to order the production cuts. One of the three commissioners, Ryan Sitton, supports the production cuts, but the other commissioners, Wayne Christian and Christi Craddick, have expressed doubts about interfering with the free market.

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The price of West Texas Intermediate, the US oil benchmark, was down to $11.02 on Monday, its lowest price in two decades. Most oil companies need to make $30 or $40 or more per barrel to make a profit.

The Permanent University Fund has more than $30 billion in assets and Houser, in written testimony to the railroad commission, said royalty income yielded $8.2 billion over the past 10 years. He said approximately 1.4 million of 2.1 million university-owned acres in West Texas are leased for oil and gas, spanning 4,000 individual oil and gas leases.

Houser cited a recent survey by the Federal Reserve Bank of Kansas City which found almost 40% of oil and natural gas producers would face insolvency within the year if crude prices remain below $30 a barrel.

“This implies that 100 companies operating on University Lands could become insolvent if there aren’t significant and quick improvements in commodity prices,” he said.

Big oil companies such as Exxon Mobil, Chevron, and Occidental Petroleum have lined up against the railroad commission ordering cuts, arguing that the free market will sort things out eventually. The companies also have the capital to survive the current low oil environment, putting them at an advantage over smaller companies.

But Houser has joined with smaller oil companies in arguing that the cuts could help inch oil prices back up. Houser wants the Texas cuts to be made concurrently with other US states, arguing that cuts must be made jointly if they are to have an effect. Regulators in two other big oil-producing states, Oklahoma and South Dakota, have also been examining cuts.

The coronavirus pandemic has resulted in a global oversupply of oil as much of the world has shut down. Motorists aren’t driving and air passengers aren’t flying, sapping the need for crude.

Russia and Saudi Arabia reached an agreement last week to end a price war that had left production spigots wide open, cutting nearly 10 million barrels of oil a day from the 100 million barrel daily global supply.

But analysts have said that is not enough because there is still a global oversupply of oil of more than 10 million barrels a day.

Texas produces 5 million barrels of oil a day, about 40% of all US oil production but the debate in the Lone Star State is whether cutting production would be enough to bring prices up, even if other states joined.

In his testimony, Houser detailed how the future price of oil will depend on how much University Lands can contribute to the Permanent Fund.

“Our latest revenue projections for the next decade indicate that revenue could range anywhere from $5 billion to $6 billion assuming $35-45/barrel oil to $8 billion to $10 billion in a $50-$60/barrel price environment. This demonstrates the need for stability and consistent development,” he said.

The university has owned the land in the Permian Basin in West Texas since 1876. An oil boom in the early 1900s lead to the Texas legislature permitting the land to be leased to oil and gas companies and began the free flow of cash that is now in jeopardy.

 

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