What Would It Take for Corporate Plans to Get Fully Funded?

Corporate defined benefit plans are in pretty good shape—for the 500 employers in the Russell 1000 that have them, the average funded status is 92%. Pretty decent, compared with U.S. public retirement programs, where the top 100 funds are at 69.3%. But what if more company funds wanted to boost their status to over 100%, so their assets would exceed their liabilities?

Fully funded status could be achieved in just three years for half the employers with DB plans, a Russell Investments report says, if they channeled 5% of their cash flow annually into their pension kitties. With a much smaller contribution, 1%, the task would take seven years.

Some companies and their plans are in better shape than others. Most of the plans (86% of the Russell 1000 companies that sponsor them) should have no trouble reaching full funding, the report says. The needed contributions are “not a significant draw on corporate cash,” the report argues. Another 7% of plans would find reaching full funding “challenging” and would need to pony up between 6% and 10% of cash flow to get there. And the bottom 7%, which is 35 plans, would need to contribute 20% or more.

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“This small minority of plans [has] historically driven the narrative, creating a false perception that the majority o corporate pension plans are in crisis,” the report observes.

Of all the ways to strengthen a plan—investment outperformance, say—higher contribution rates are “the most straightforward solution,” the report states. The ideal is “a prudent contribution rate in concert with a prudent investment policy.” The report adds that Russell has seen “portfolio management solutions that tend to make a simple problem more complicated than it needs to be.”

The problem for DB plans lately, the report notes, is that higher interest rates have hurt investment performance for both stocks and bonds, used to undergird the portfolios that deliver benefits. Certainly, higher rates have decreased future liabilities, but “growth assets have not been able to decrease pension deficits,” Russell points out.

To be sure, a lot of company plans are getting out of the game by shunting their pensions to insurers. This year is expected to be a strong one for pension risk transfers, with the first half double the amount of the comparable period in 2021, according to LIMRA.