Rising Funded Levels to Spur Risk Transfers, Fixed Income

US corporate defined benefit pension plans saw their first annual increase in funded levels in four years in 2017, which will likely lead to more risk transfer strategies and increased fixed-income allocations, according to Goldman Sachs Asset Management’s most recent annual pension review.

Voluntary contributions, rising interest rates, and strong equity returns have spurred a sharp rise in corporate DB funded levels, according to the report. Goldman said the funded level of the 50 largest US defined benefit plans in the S&P 500 increased to 85.4% at the end of 2017 from 81.1% at the end of 2016, and it estimates that funded levels have continued to rise to approximately 86% so far in 2018.

Goldman said it expects the increased funded levels will lead to more plans allocating resources to fixed-income assets. While some plans did not shift asset allocation in the past when funded levels had risen, the report said things will likely be different this time.

“Actual allocations to fixed income were only marginally higher than the year before,” said the report, “indicating that 2018 may be the year that many plans undertake portfolio adjustments.”

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The report said the reason companies have not yet shifted more assets to fixed income could be due to a hesitancy over the Federal Reserve raising short-term interest rates, signs of inflation, and an expectation by some that long-term interest rates will rise. Also the outperformance of equities over fixed income in 2017 could be a factor.

“In some cases, it is possible that organizations may not yet have a governance structure in place that can effectuate such adjustments nimbly,” said the report, “potentially leaving them exposed if equity and interest rate volatility were to increase.”

The report reviewed the defined benefit pension plans of every company in the S&P 500 based on the information in their annual 10-K reports. In particular, the report focuses on the 50 companies in the S&P 500 with the largest US defined benefit plans by asset value. It is intended to examine several aspects of the corporate pension system, such as funded status, how things have developed in 2018, and what pension plans did regarding asset allocation. It also outlines how the rest of the year may play out for corporate defined benefit plans.

According to the report, the main factor that helped boost funded ratios was the significant contribution activity among plan sponsors last year. Goldman estimates that 2017 contributions to US defined benefit plans among the S&P 500 companies reached their highest level since 2012, with much of the activity being voluntary. It said several companies, such as UPS, Lockheed Martin, and FedEx, cited tax reform as a motivating factor in making voluntary contributions.

“We expect strong voluntary contribution activity to continue this year,” said the report. “This view is based on disclosures around what companies expect to contribute in 2018 and our understanding of how actual contributions, in aggregate, tend to correlate with expected contribution disclosures.”

Strong asset returns were also a contributor to increased funded levels, as Goldman estimates the mean and median actual return figures of the plans were just below 15%. However, much of the positive impact of asset returns merely offset interest costs, service costs, benefit payments, and actuarial losses from lower discount rates, said the report.

The report found that contributions added approximately 3.5 percentage points to the aggregate funded status, while the overall increase in funded status was a little over four percentage points, indicating that the vast majority of the aggregate increase in funded status can be attributed to contributions.

Tags: Corporate Pension, Goldman Sachs Asset Management, Pension, S&P 500

Keeping greenhouse gas emitters in check with the Paris Climate Agreement goals, New York State Comptroller Thomas DiNapoli has sent letters to 10 companies within the New York State Common Retirement Fund’s (NYS Common) portfolio.

“Climate risk is one of the greatest threats to the state pension fund and its long-term investments,” DiNapoli said in the letter, addressing that the transition will require “fundamental” and sometimes “disruptive” changes that could affect every investment in the fund’s portfolio.

“As a long-term investor, we want the companies in our portfolio to demonstrate a commitment to sustainability, lower emissions, and a low-carbon future,” he wrote.

In the letters, DiNapoli urges Phillips 66; Xcel Energy; Valero Energy; Martin Marietta Materials; Berkshire Hathaway; Calpine; Delta Air Lines; NextEra Energy; Entergy Corp; and Southern Company to make long-term reductions to their emissions and adopt “time-bound, quantitative, company-wide” goals. The Comptroller also wants the companies to consider the reduction needs outlined by the Paris Climate Agreement, which sets to limit the increase in global average temperature below 2°C above pre-industrial levels with a 1.5°C limit.

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In order to meet the 2°C target, scientists estimate a 55% global reduction in greenhouse gas emissions will be needed by 2050. The US needs an estimated 80% reduction to help meet these expectations.

ExxonMobil, AES, Duke Energy, and other pollutants in the fund’s portfolio are currently in engagement programs with the fund to help curb their emissions.

The letter follows DiNapoli’s Tuesday announcement in which he revealed that DTE Energy, Dominion Energy, and Southwestern Energy had agreed to detail how the effects of efforts made to achieve the Paris Agreement’s goals will affect them as well as how each company can adapt to a lower carbon future. This led to NYS Common withdrawing shareholder requests it had previously made with DTE, Dominion, and Southwestern.

“Corporations need to recognize that a transition to a lower carbon economy is already underway and their future success demands adjusting to this new reality,” DiNapoli said in a statement. “We will continue to monitor and engage with these companies as they report on their efforts to reduce carbon emissions.”

Tags: ESG, New York State Common Retirement Fund (NYCRF), Paris agreement, Pension, Thomas P. DiNapoli