We expected a big year for pension contributions, but we didn’t think it would be this big. The 20 members of the $20 billion club, representing 40% of the global DB liabilities among US-listed corporations, didn’t just add on to 2016 contribution totals, they doubled them. They nearly tripled 2015 contributions. Combined with their highest recorded investment earnings, pension assets increased by around $85 billion for this group and offset a 45 bps drop in discount rates. This led to an average 5% improvement in funded ratio and $32 billion reduction in the funding deficit.

A record-breaking year in five ways

In a new paper, based on hot-off-the-press 10-k filings data, we detail the results of an intriguing year for the $20 billion club. At least five records were broken:

1. Contributions Looking back over the last decade, contributions jumped after the Global Financial Crisis in 2008 due to reduced funded status (and corresponding increase in funding requirements), then dropped several years later as Congress granted various versions of funding relief (which decreased funding requirements). Despite relatively stagnant funded status and no changes in funding laws (other than the ongoing effects of previous laws), 2017 is an anomaly, as shown in the chart below. The reasons for the abrupt increase were varied (e.g., PBGC premiums, improving funded status), but one rose to the surface: tax reform. While a new bill was not passed until late in in the year, some large DB sponsors accelerated contributions to maximize their tax deduction in good faith that the corporate tax rate would soon decline.


Source: Russell Investments research paper: Owens, Justin, $20 billion club posts record contributions in 2017 as funded stats jumps, February 2018.

2. Investment earnings Plan sponsors have benefitted from cooperative markets over the last several years. Good earnings years have been common, but no individual year since 2005 has generated such a high return (in dollar rather than percent terms). The fact that many of these sponsors have shifted a significant portion of their assets to liability-hedging fixed income makes this even more noteworthy.


Source: Russell Investments research paper: Owens, Justin, $20 billion club posts record contributions in 2017 as funded stats jumps, February 2018.

3. Discount rates As mentioned, discount rates – based on the yields of high quality corporate bonds – dropped during 2017 by an average 45 bps to around 3.7%. The previous low was in 2012, when discount rates were around 4.0%.

4. Total liabilities We first called “peak pension” – the high point for pension liabilities – shortly after 2012 due to a large drop in discount rates that year and anticipation of more big risk transfer deals like GM and Verizon. We later revised peak pension to be the end of 2014 due to another drop in rates, in combination with new, more conservative, mortality assumptions (both of which increased liabilities). It appears we again spoke too soon, as risk transfer transactions in this group have been minor relative to 2012, while rates have bottomed out again. Pension liabilities for this group are now around $975 billion (previous high was $956 billion). Will we see liabilities reach $1 trillion?

5. Total assets Here is a record we expect to be broken. Pension assets for this group are now about $820 billion – the previous high was $765 billion. With an average funded status of about 84%, we hope to see assets continue to increase as sponsors strive for fully-funded plans.

The full research paper is available here.

Disclosures

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

Investing involves risk and principal loss is possible.

Past performance does not guarantee future performance.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Indexes are unmanaged and cannot be invested in directly.

Russell Investments' ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments' management.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.

Copyright © Russell Investments Group LLC 2018. All rights reserved.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.

UNI-11227

© Russell Investments

Read more commentaries by Russell Investments