The Hottest Club Around: The Pension World’s $20B Club

Five or six corporations crossed the $20 billion pension liability threshold in 2012, according to Russell research, including 3M, Johnson & Johnson, Delta Airlines, and Federal Express.

(March 4, 2013) – Falling interest rates have triumphed over strong equity markets to make Russell’s $20 billion club—that is, $20 billion in corporate pension liabilities—the hottest thing around.

Five or six corporations crossed that threshold in 2012, according to Russell’s Chief Research Strategist Bob Collie, marking at least a 25% increase. SEC filings from 2011 show just 19 members belonging to the group at the end of the year. Benefit obligations rose from $860.1 billion for those 19 at the start of 2012 to $914.8 billion at its close. The group’s net funding shortfall likewise climbed from $182 billion to $220 billion.

“The surprising part of it is that we track funded status throughout the year and didn’t expect a major change,” Collie told aiCIO. “Yet when the number came in, we saw this fairly significant drop.” He cautions against taking the rise in unfunded obligations too seriously, however: “It’s just sort of this technical thing. It washes out over the long term.”

The technical thing Collie remarked on is the discount rate-based calculation used to formulate corporation’s funded statuses. Despite a strong year for investment performance overall and substantial contributions from plan sponsors to their pension funds, the funding gap failed to narrow due to persistently low interest rates.

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Collie’s look at what happened in the corporate pension space in 2012 turned up another notable trend: an uptick in risk transfer activities. “There were the unusual ones—GM and Verizon—who grabbed the headlines,” he said, “but the simpler versions—such as paying out lump sums—are happening at a lot of corporations, and they make sense for them.”

Collie called the outflow of capital in the form of lump sum payments a “serious” shift, but declined to forecast what 2013 would bring in the risk transfer space. “It’s very hard to predict,” he said “If you would have asked me last year if we were going to see $40 billion in risk transfer, I wouldn’t have foreseen it. That said, I think a lot of corporations are going to be very interested in it.”

(March 4, 2013) — A cancer charity in the UK has used the high value of it government debt portfolio to afford a pension fund insurance deal, as some of its peers have buckled under the weight of liabilities.

The Institute of Cancer Research (ICR) has insured £30 million of liabilities with specialist insurer Pension Corporation through a buy-in, the charity announced today.

ICR, which is over 100 years old, took advantage of the high price demanded for UK-government issued debt to afford an annuity purchase.

John Roberts, chair of the board of trustees for the ICR Pension Scheme, said: “Like many organisations, we were facing potentially significant financial liabilities from our pension scheme as our retiring staff lived longer and drew their pensions over a longer period. We’re therefore very pleased to have insured ourselves against those financial risks, and to have controlled the costs of doing so by taking advantage of the high value of gilts.”

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The process of quantitative easing (QE) conducted by several central banks around the world has seen the price of their government-issued debt shoot up as yields have come down to record lows. This has generally served to push up liabilities, but in this case was turned to the pension fund’s advantage.

Matt Barnes, senior actuary at Pension Corporation, said that given the current value of gilts, a buy-in should not result in a significant additional contribution cost for the sponsor. He added that a large number of schemes were looking at the gilts-for-annuities trade.

The announcement came a week after a trio of organisations representing charities in the UK wrote to the Department of Work and Pensions outlining their concerns over the threat pension funds made to their members.

The CEOs of the Charity Finance Group, National Council for Voluntary Organisations, and National Association of Voluntary and Community Action said in their letter that the pensions could deliver a “devastating” blow to charities and other non-profit organisations.

“Many charities originally entered these schemes in good faith. But, as economic conditions worsen, are ultimately the unintended victims of schemes designed for corporate entities which are wholly unsuitable for charities as non-associated employers,” the letter said.

As these organisations do not have large corporate sponsors or shareholders to approach for additional contributions, several have succumbed to the pressure imposed by their pension fund.

In January, one of the largest UK children’s charities, Barnardo’s, announced it was consulting with staff over potentially closing its defined pension fund this month due to burgeoning liabilities. Smaller organisations have also fallen victim to their schemes’ obligations. In 2009, a regional branch of Age Concern – an organisation tasked with helping people in their old age – had to close after being engulfed by its pension fund deficit. Its members were transferred to the UK lifeboat, the Pension Protection Fund.

“Faced with growing contribution levels, there is no option but to commit donated resources to meeting obligations at a time when this is needed to meet increasing demand for services,” the letter from the three CEOs said.

Consulting firms Towers Watson and Punter Southall advised on the ICR and Pension Corporation deal.