It was looking like a banner year for large pension plan sponsors through most of 2018. But it was not to be.
For the companies that sponsor the 20 largest U.S. pensions plans, the aggregate funded ratio — the actuarial value of current assets divided by the actuarial value of future liabilities — grew by 5% over the first three quarters, according to Russell Investments.
Higher interest rates combined with strong equity-market performance drove the improvement, which followed another 5% funded-ratio increase in the full prior year.
Unfortunately, the value of the global stock market plunged by 13% in the fourth quarter of 2018, wiping out almost all of the yearly gain. The final tally: the funded ratio inched up from 84.4% at the end of 2017 to 85.3% at year-end 2018.
The aggregate funded ratio for the 20-company group has been underwater since 2008, meaning the plans don’t have enough assets to cover their future expected liabilities.
Russell says it tracks these large plans, a group it calls the “$20 billion club,” because major developments for corporate pension plans typically begin within the group.
Among individual plan sponsors, most funded ratios stayed within 2% of their starting positions in 2018. But there were some notable exceptions: Lockheed Martin and General Electric made large plan contributions that helped their ratios grow by 6% and 4%, respectively.
Overall for the 20 companies, contributions were $6.5 billion higher than had been expected at the beginning of the year. GE, which had ended 2017 with the group’s lowest funded ratio at 67%, made the largest contribution, $6.8 billion, bringing its ratio to 75.6%.
However, contributions are expected to plummet this year, perhaps to the lowest level in 15 years. “The discretionary contributions in 2017 and 2018 were mostly opportunistic and strategic,” Russell said. “Many sponsors hoped to take advantage of the relatively high tax deduction before new corporate tax rates took effect. This short-term window of opportunity has now closed.”
In fact, based on regulatory filings, the 20 companies are expected to contribute just $8.5 billion in 2019, down from a high of $37.5 billion two years ago.
Meanwhile, the trend of large plan sponsors transferring pension risk by purchasing annuities from insurers continued in 2018. Fedex made the largest transaction; at just over $6 billion, it was the largest one since 2012, when General Motors and Verizon Communications launched the trend by offloading a combined $33 billion of pension obligations.
Lockheed Martin transferred $2.5 billion of pension risk to insurers, representing a significant portion of its plan liabilities. The deal was unusual, according to Russell, in that in included a buy-in annuity purchase in anticipation of the plan’s termination.
With a buy-in annuity purchase, the sponsor still pays the benefits to plan participants but is reimbursed by the insurer. While such transactions have been uncommon in the United States until now, Lockheed Martin’s deal may signal a new move in that direction, according to Russell.
Aside from companies mentioned above, the $20 billion club includes 3M, AT&T, Boeing, Dow Chemical, DuPont, ExxonMobil, Ford, Honeywell, IBM, Johnson & Johnson, Northrop Grumman, Pfizer, Raytheon, United Parcel Service, and United Technologies.