As Milliman notes upfront in their annual pension funding study, given all that has happened in the last few months, a look back to 2019 can be irrelevant. The economic events surrounding the Covid-19 pandemic and the subsequent fiscal policy actions has far-reaching implications on how corporations will make decisions for their pension plans in the next few years. However, the survey did reveal some interesting trends for corporate defined benefit plans.
One positive statistic worth mentioning was that as of the end of 2019, most corporations continued to experience improvements in funded status. Half of the survey participants had a funded ratio (PBO basis) of 90.0% or better. Pension plan asset gains were the major contributor to improvements, as financial markets rebounded from the fourth quarter 2018 market sell-off.
Funded status improvements could have been greater if it were not for lower interest rates that accompanied this market correction. Overall, liability valuations increased as the Fed lowered rates to counter the impact of the significant decline in the equity markets at the end of 2018. As realized again in 2020, Fed policy is a nemesis to corporate pensions.
The survey also pointed to the fact that pension liabilities were adjusted lower because corporate defined benefit plans revised life-expectancy calculations based on lower mortality ages published by the Society of Actuaries as Scale MP-2019. (The reduction in life expectancy was estimated to reduce pension obligations by 0.3-1.0% as compared to the previous year’s release, according to the SOA.)
Plan sponsors report that they continue to make progress in utilizing liability-driven investment strategies (LDI), although typical allocations were similar (equity; 32.5%, fixed income; 49.1%, and alternatives and other investments; 18.4%) in 2018. (See Figure 1). Given low interest rates, plans are still trying to find the right balance of managing risk and generating return.
Pension risk-transfer activities continued in 2019; buyouts and lump sum payments were top choices to reduce pension liabilities. Milliman estimates $13.5B of obligations were stripped from balance sheets. While corporations continue to look to reduce PBGC premiums, making excess contributions or buying annuities may be pricey strategies in a post-pandemic world.
Finally, the survey showed that 81 out of the 100 corporations surveys had pension deficits worth less than 10% of their market capitalization, although one had a deficit greater than 50% of it’s market cap.
*Source: Milliman 2020 Corporate Pension Funding Study, April 28, 2020, and Society of Actuaries.