Russell's '$20 Billion Club' Sees Sharp Increase in Assets, Liabilities

(March 2, 2011) — Assets and liabilities grew dramatically in 2010 for the 16 publicly listed US corporations with pension liabilities over $20 billion, according to a new report by Russell Investments.

Bob Collie, chief research strategist for the Americas Institutional at Russell Investments, noted that the report confirms a trend away from equities. “Today, a low 40% allocation to equity markets is normal, which represents a change from previous years,” he told aiCIO, describing the effort to de-risk plans. His belief in funds adjusting their investment policy to lower their allocations to equities mirrors recent research from two separate surveys of pensions, which found that schemes both domestically and globally are intending to reduce their exposure to equities as well as fixed-income, planning greater allocations to alternatives.

On a global basis, in its fifth bi-annual Pension Funds Asset Allocation Survey compiled from studying 50 institutional investors representing nearly $205 billion of assets, financial services consultant firm bfinance noted that the findings from its recent study signals a shift in sentiment by pension funds, as they are seeking to diversify away from core asset classes and into property and alternatives, with infrastructure and private equity attracting the most popularity.

This change in the US is also reflected in the UK, where the UK’s Universities Superannuation Scheme, with assets of roughly $49 billion as of March 31, has decided to pump more money into emerging markets and hedge funds. Chief Investment Officer Roger Gray told Reuters that as the scheme moves away from equities, it will also invest at least 1.5%, or close to $735 million, in hedge funds, with a longer-term target of 5%.

According to Russell’s newly published analysis, these corporations – which the new report labels as the “$20 billion club” – now has a combined $740 billion of pension liabilities on their balance sheets, up from $700 billion last year. Russell’s ‘$20 billion club’ represents close to 40% of the total pension liabilities on all public US corporate balance sheets. The value of their assets rose from $578 billion to $619 billion over the same time in 2010.

A notable feature of the reports, according to Collie, was the fact that contributions from corporations are not in every case the required contribution. “In a number of cases, corporations chose to contribute more than required, using the availability of free cash flow to store up contributions to avoid paying out later,” he said.

The firm noted that the combined pension shortfall of roughly $121 billion is likely to trigger substantial catch-up contributions in the next few years as a result of requirements built into the Pension Protection Act of 2006. The corporations contributed a combined $21 billion over the last year, which represents more than double the amount in 2008.