Corporate pension contributions totaled $62 billion in 2017, with seven employers contributing more than $2 billion to their plans, and another 10 adding at least $1 billion to their pensions’ coffers, according to consulting firm Milliman.
The annual study of the 100 largest defined benefit pension plans sponsored by US public companies found that the contributions pushed last year’s total assets to a record $1.55 trillion, and represent a 45% increase from the $42.6 billion contributed in 2016.
“There were incentives to increase contributions in 2017,” Zorast Wadia, co-author of Milliman’s Pension Funding Study, said in a release. “Additional contributions can both reduce the PBGC premiums paid by these plans, and allow them to leverage higher tax deductions in light of tax reform enacted at the end of 2017. It’s a trend that’s likely to flourish in 2018.”
Rising global equity markets contributed to strong investment returns in 2017, with the average plan earning approximately 12.7%, according to Milliman. Overall, investment returns added $175 billion to plan assets, far more than the $92 billion that was expected based on the companies’ long-term investment return assumptions.
The funded ratio for the Milliman 100 plans rose from 81.1% in 2016 to 86.0% in 2017, an increase due largely to strong investment returns coupled with a modest decline in life expectancy assumptions, and the higher level of plan contributions as noted above. Funding ratios for plans ranged from a low of 62.4% for American Airlines to a high of 155.0% for NextEra Energy, Inc.
An additional factor contributing to the improvement in funded ratios was a modest decline in life expectancy assumptions due to participants and pensioners not living quite as long as previously predicted by the Society of Actuaries. This reduced the actuarial present value of the pension benefits, referred to as the projected benefit obligation (PBO).
Despite the strong equity markets and higher short-term interest rates, the discount rate declined during 2017 to 3.60%, down from the 3.97% rate a year earlier. As a result, the PBO of the Milliman 100 plans increased to an all-time high of $1.8 trillion (an $82 billion increase since the end of 2016). The report also points out that the $62 billion in contributions still left a $20 billion hole to be covered, which investment returns helped to overcome.
During 2017, pension risk transfers programs matured, with an overall acceptance by the participants and the financial markets, according to Milliman. It said it is unaware of any significant litigation by participant plaintiffs claiming they were harmed or otherwise disadvantaged by a pension risk transfer.
The study also said now “measurable reductions” in future premiums to be collected by the Pension Benefit Guaranty Corporation (PBGC), which it said experienced funded status gains in the federal fiscal year ending September 30, 2017. The PBGC recorded a 91% funded ratio for the plans that terminated and were sent to PBGC as the receiving custodian. In 2017, PBGC total premium income exceeded pension claims by more than $1 billion for the first time.