S&P 500 Pension Funding Increases Nearly 5% in 2017

The aggregate funded ratio for S&P 500 companies’ corporate defined benefit pension plans increased to 85.8% at the end of fiscal 2017 from 80.9% at the end of fiscal 2016, according to a report from Wilshire Consulting.

“Robust investment returns and contributions drove asset values higher in 2017,” Ned McGuire, managing director of Wilshire Consulting, said in a release. “As interest rates fall, companies are forced to lower their discount rates, thereby increasing the accounting value of total pension liabilities.”

Wilshire estimates that aggregate assets increased to $1.433 trillion as of fiscal year-end 2017, an increase of nearly 6.5% from $1.346 trillion as of fiscal year-end 2016. It said robust investment returns and contributions drove asset values higher for the year, and that contributions increased the aggregate asset value by 4.48% for the year, almost all coming from plan sponsors. Investment income increased the asset value by more than 13% for the year, while benefit payments are estimated to have decreased the asset value by nearly 7%.

The median discount rate decreased to 3.66% from 4.14%, which McGuire said is the primary reason for the aggregate actuarial loss of $92.5 billion. Liabilities increased by $5.2 billion, or 0.3%, in 2017, he added. At the same time, the aggregate pension deficit decreased to $236.5 billion at the end of 2017 from $318.3 billion at the end of 2016.

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“The expected rate of return for pension assets has been declining in recent years,” said McGuire. “The median expected return was 9.50% at the end of 2000 and fell to 6.90% at the end of 2017.”

Of the plans studied, 17.7% had pension assets that equal or exceed liabilities as of fiscal year-end 2017, compared to 10.6% at year-end 2016. By comparison, at fiscal year-end 2007, 42% of S&P 500 defined benefit plans were at a fully-funded or surplus status.

For the report, Wilshire Consulting collected data on US pensions from 10-K filings for companies in the S&P 500 Index at fiscal year-end. All data for 2017 is based on S&P 500 Index constituents as of year-end 2017 and therefore may differ slightly from the list of companies represented in earlier years, said Wilshire.

Tags: Corporate Pension, Defined benefit (db) pension plans, Pension, S&P 500

The chief investment officer of the second-largest US retirement plan, the $224 billion California State Teachers’ Retirement System (CalSTRS), has ordered a review to determine if the pension organization should divest from the stock and bonds of two public companies that run private prisons.

Chris Ailman told the CalSTRS Investment Committee on July 20 that he was ordering the review because he has “the ability to take something I think is a risk to the portfolio,” and examine it.

Ailman said he wanted to determine whether the prison companies were violating CalSTRS’s human rights risk factor, one of 21 risk factors adopted by the pension system’s board to guide investments.

Ailman did not reveal how long the review would take. He and investment committee chairman Harry Keiley, a Santa Monica teacher, acknowledged to several dozen teachers who attended the meeting calling for divestment that CalSTRS staff was aware of their concerns.

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An examination of divestment may not be simple. Ailman said the human rights risk factor was more written for countries and not aimed at individual companies, calling the issue “complex.”

The CIO’s comments come as the two largest private prison companies, Nashville, Tennessee-based CoreCivic Inc., and Boca Raton, Florida-based Geo Group, have come under increasing criticism from Democratic lawmakers and immigration rights groups about their housing of immigration detainees under the Trump administration’s immigration crackdown.

Earlier this month, New Yok State Controller Thomas DiNapoli, the sole trustee of the $207 billion New York State Common Fund, ordered the third-largest US pension fund to divest its stock of CoreCivic and GEO Group. The New York City Pension Funds had divested of the two companies back in 2017.

Among the advocates at the July 20 meeting were several dozen teachers, including representatives of the Berkeley, California, school system and other school districts. They argued CoreCivic Inc and the GEO Group disregarded human rights and civil liberties.

Both companies have denied they violate human rights.

Ailman’s comments came before the divestment representatives spoke. His announcement was also surprising, given CalSTRS’s stance on divestment.

Traditionally, West Sacramento-based CalSTRS and its larger Sacramento neighbor, the $355 billion California Public Employees’ Retirement System (CalPERS), have opposed divestment as a tactic. For example, they rejected calls by activists to divest of fossil fuel companies. Pension system officials have argued that engagement and having a seat at the corporate table can better influence the behavior of corporations in a positive way than divestment when the pension plans lose their voice.

“The Investment Committee opposes any divestment effort that would either implicitly or explicitly attempt to direct or influence the Investment Committee to engage in investment activities that violate and breach the Trustees’ fiduciary responsibility,” reads the CalSTRS divestment policy.

However, CalSTRS did divest from some gun manufacturers following the 2013 tragedy at Sandy Hook elementary school in Connecticut. And in May, the CalSTRS Investment Committee voted to publicly engage retailers of military-style assault weapons, before taking divestment actions.

In comparison, CalPERS in March rejected divesting from companies whose stores sell the assault weapons.

Ailman told the investment committee that CalSTRS investment staff had been engaging with the private prison companies even before the July 20 announcement.

“This means that we’re going to just contribute more resources,” he said. “We’ll step it up a notch and travel directly and engage them directly and talk to them.”

Ailman said he has also been in touch with CalPERS Chief Investment Officer Ted Eliopoulos and University of California Regents Chief Investment Officer Jagdeep Bachher about the private prison securities divestment issue.

Advocates calling for divestment are expected to target CalPERS next. UC, meanwhile, began divesting of its private prison holdings in late 2015.

CalSTRS investments in the two private prison companies is relatively small compared to its approximate $150 billion global equity and fixed income portfolio. It owns $5.3 million worth of CoreCivic stock and fixed income securities, and $6.6 million of GEO company stock and fixed income securities, shows CalSTRS statistics.

Ailman said there are also two other public companies that social media reports have linked to the private prison immigrant issue, but that he could not currently assess the accuracy of those reports, so those companies were not be part of the formal divestment inquiry.

He did not name the companies, but said CalSTRS staff will be looking to obtain additional information on those corporations and their practices . CalSTRS sources identified one of the companies as defense manufacturer General Dynamics, whose information technology unit has a contract to provide case-management services for immigrant children being released from temporary shelters. CalSTRS has $108 million in General Dynamics stock and fixed income securities, show pension fund statistics.

Some of the advocates calling for CalSTRS to divest of the two private prison companies also want the pension plan to divest of General Dynamics holdings.

Tags: CalSTRS, Chris Ailman, Divestment, prisons