Corporate Pension Funding Ratios Nearly Flat in 2019 Despite 17.3% Returns

Plunging discount rates offset second-largest investment return in 20 years.

Despite raking in investment returns of 17.3% in 2019, the funding ratio of the 100 largest US corporate pension plans rose only slightly for the year because of plummeting discount rates.

According to consulting and actuarial firm Milliman, the asset gains last year were the second highest in 20 years for the plans, behind only 2003’s investment return of 19.5%. However, the strong returns were nearly canceled out by a 94 basis point (bps) drop in discount rates to 3.06% from 4%. The falling rates raised pension liabilities and caused the overall pension funding ratio for the year to edge up slightly to 87.5% as of Dec. 31 from 87.1% at the end of 2018.

“Corporate pensions have experienced a lot of turbulence so far in 2020, and plan sponsor strategies in response to the recent economic stressors and the CARES [Coronavirus Aid, Relief, and Economic Security] Act are just beginning to take shape,” Zorast Wadia, co-author of Milliman’s Pension Funding Study, said in a statement. “Organizations that are considering deferring contributions this year should keep in mind the resulting impact on funded status, tax deductions, PBGC [Pension Benefit Guaranty Corporation] premiums, and pension expense.”

The $34 billion in contributions made by the sponsors of the plans in 2019 was lower than expected, according to Milliman, following two years of record high contributions of $61.8 billion and $59.5 billion for 2017 and 2018, respectively. Among the 100 companies sponsoring the plans, 13 contributed at least $1 billion in 2019 with the largest being made by United Parcel Service Inc., which made $2.1 billion in contributions last year. In 2018, six employers made larger contributions, with AT&T leading the way with $9.3 billion in contributions.

The trend of plan sponsors implementing liability-driven investment strategies, which involve shifting more assets into fixed income, continued in 2019, according to the study, as equity allocations in the pension portfolios increased only slightly to an average of 32.5% during 2019 from 32.1% at the end of 2018.

The percentages of pension fund assets allocated to equities, fixed income, and other investments were 32.5%, 49.1%, and 18.4%, respectively, at the end of fiscal year 2019, compared with 32.1%, 48.0%, and 19.9%, respectively, at the end of fiscal year 2018. Unlike in 2018, when plans with fixed income allocations of more than 50% outperformed other plans, those plans underperformed in 2019.

Plan sponsors continued to execute pension risk transfers in 2019, led by GE, Lockheed Martin, PepsiCo, and Ford, which reported total transactions of $2.7 billion, $1.9 billion, $1.3 billion, and $1.3 billion, respectively. However, the pension risk transfer market was down from the record high in 2018 as Milliman estimated that there were $13.5 billion in risk transfers in fiscal year 2019 compared with $18.8 billion the previous year. 

The transfers continued to be spurred by rising PBGC premiums, according to the study. PBGC flat dollar premiums increased to $80 in 2019 from $74 in 2018, while the variable rate premium increased to 4.3% of a pension plan’s PBGC funded status deficit in 2019, from 3.8% in 2018.

The results of the Milliman 2020 Pension Funding Study are based on the pension plan accounting information disclosed in the footnotes to the companies’ 10-K annual reports for the 2019 fiscal year and for previous fiscal years.

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