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

(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. 

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.”