Corporate Pensions Likely to Miss 2015 Return Expectations

US corporate pensions are unlikely to meet 2015 return expectations of 7.3% due to poor performance in August and September, according to a new report by Milliman.

The actuarial firm’s latest index of corporate pension firms revealed defined benefit plans lost $51 billion in the third quarter of 2015. This 2.5% quarterly investment loss marked the largest third quarter loss for corporate pensions since 2011.

In the same period, liabilities increased by $15 billion, growing the funded status deficit by $66 billion.

In September alone, corporate pensions lost $28 billion and gained $9 billion in liabilities, resulting in a further drop in funding. The funded ratio for corporate pensions at the end of September was 81.7%, down from 83.6% a year prior, according to Milliman.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Similar studies by BNY Mellon and Wilshire Consulting showed corporate pension funding status dropping in September to 81.8% and 81.3%, respectively.

“The calendar year began with strong equity performance that seemed so promising, and yet here we are looking at an overall decline in equities for the year,” said John Ehrhardt, principal and consulting actuary at Milliman.

In order to meet the projected annual returns of 7.3%, pensions would need a “massive rally” of nearly 8.4% in gains in the fourth quarter, said Ehrhardt.

Milliman also forecasted DB plans’ funded ratios would increase to 82.2% and 84.2% at the end of 2015 and 2016, respectively, if they are able to achieve the expected annual return.

corporate pensions Source: Milliman

The California Public Employees’ Retirement System (CalPERS) is to begin talks with thermal coal companies in its portfolio, in response to pressure from Californian politicians.

The move is the first step required by Senate Bill 185, which seeks to prohibit CalPERS and the California State Teachers’ Retirement System (CalSTRS) from investing in thermal coal companies.

“We remain committed to encouraging our investment managers, portfolio companies, and policy makers to engage in responsible environmental practices.” —Anne Stausboll, CalPERSThe bill was introduced by Kevin de León, California’s senate president, and signed this week by Governor Jerry Brown.

Senator de León called for the two giant pension funds—which have roughly $477 billion in assets between them—to divest from coal companies last year, but CalPERS initially pushed back, citing a preference for engaging with companies first before divesting.

For more stories like this, sign up for the CIO Alert newsletter. 

CalPERS now intends to meet with the coal companies it owns to ascertain the risks posed to these holdings by a changing climate. In a statement on its website CalPERS confirmed that, following talks with the 27 thermal companies in which it has stakes, it will “evaluate divestment” from the holdings in line with the senate bill.

CalPERS CEO Anne Stausboll said her fund had “a long history of constructively engaging companies to advance sustainable business practices.”

“We applaud Senator de León and Governor Brown for their commitment and attention to this important issue,” Stausboll added. “CalPERS has been at the forefront of tackling climate change issues through policy advocacy, engagement with portfolio companies, and investing in climate change solutions. We remain committed to encouraging our investment managers, portfolio companies, and policy makers to engage in responsible environmental practices as part of our duty as a principled and effective investor.”

CalPERS’ stakes in thermal coal companies are worth an aggregate $57 million, the pension said. Thermal coal is predominantly used in power generation, and according to Senate Bill 185 it is the largest contributor to climate change in the US.

CalSTRS, meanwhile, has yet to formally respond to the newly signed bill. However, in a response to a previous draft published in June, the pension stated that it had already begun a policy of “due diligence, engagement, and possible divestment with respect to the investments affected by the bill”.