Russell: Pension Liabilities Outpaced Assets in 2011

(February 29, 2012) — While asset returns were positive in 2011, liabilities still outpaced the growth in assets for the publicly listed corporations in the United States with pension liabilities over $20 billion, according to an analysis by Russell Investments.

According to the firm, the “$20 billion club” — a group that represents nearly 40% of the pension assets and liabilities of all US-listed corporations — now has a combined shortfall of worldwide pension assets below liabilities of $173 billion on their balance sheets, up from $121 billion last year. In other words, the analysis showed that pension liabilities grew faster than assets in 2011, and cash contributions have continued to rise.

“When combined, the $20 billion club represents more than three quarters of a trillion dollars in pension liabilities, so it is a good guide to what is happening in the system as a whole. Even though corporations are taking steps to close their pension deficits, falling interest rates in 2011 meant that just about everyone’s position deteriorated,” said Bob Collie, chief research strategist at Russell Investments, in a statement.

He added: “Pension risk matters a great deal. Both interest rates and asset values can change quickly, so it’s a very fluid situation. But unless market conditions prove exceptionally favorable, we are likely to see sponsoring corporations continuing to make significant contributions for several years to come.”

The solution to rising shortfalls for pensions worldwide, according to Russell: De-risking, diversifying, and focusing on total portfolio outcomes via multi-asset portfolios.

To help ameliorate the shortfall, the firm foresees rising cash contributions in the years ahead — with the total contributions made by these 16 corporations over the next seven years expected to be close to $250 billion.

Expecting higher contributions by plan sponsors in the years ahead, Collie warned investors earlier this month to beware of ‘crowded trades.’ As a result of institutional investors putting more and more money into the market at the same time, investors should be aware of the danger of such trades distorting the market as investors try to buy and sell simultaneously, Collie told aiCIO. “Overall, the general need for higher contributions among plan sponsors is not surprising as many factors have aligned,” he said, citing falling interest rates, higher liabilities, and the Pension Protection Act’s (PPA) redefinition of shortfall requirements. 

“Perhaps the single most important factor is the way that the PPA has redefined how plan sponsors must make up a shortfall. When there’s a shortfall, the PPA now says plan sponsors have seven years to make it up. Previously it was roughly double that. So it means contributions are now much more responsive to changes in the market situation,” Collie said.

Russell’s research follows a report released in December by Mercer that showed the outlook for 2012 pension plan contributions and expense is bleak. “Even though discount rates moved somewhat higher during November, they are likely to be in excess of 40 basis points lower at the end of this year than they were at the end of 2010,” said Kevin Armant, Principal in Mercer’s Financial Strategy Group. “Because equities have also underperformed expectations, corporations who use a December 31 measurement date will likely see larger pension liabilities on their balance sheet, as well as higher 2012 pension expense.”