The results of the Milliman annual 2018 Pension Funding Study (PFS) show that private, single-employer defined benefit plans significantly improved their funding deficit over 2017 by about $72 billion, of which $62 billion was through contributions. The same plans that participated in the study ended the year with a funding deficit of $252 billion. The 2017 contributions represented a 45% increase in contributions over the previous year. In some cases, corporations are borrowing money at historically low interest rates to achieve these objectives.
The study also indicated the increase in contributions stemmed from plan sponsors anticipating the 2017 Tax Cut and Jobs Act, which led to this acceleration to maximize corporate tax deductions ahead of 2018. The ability to reduce PBGC variable rate premiums for the 2017 plan year was also a crucial factor.
Beyond contributions, other factors also contributed to a better funded position. The average plan in the study earned 12.7% return on assets (the average expected return was 6.8%). In addition, a decline in life expectancy relative to the Society of Actuaries assumptions also reduced pension benefit projections and liabilities.
Pension risk transfer (PRT) activities, such as partial terminations of liabilities associated with terminated, but not yet retired participants also continued in 2017. This form of liability de-risking was driven primarily to reduce PBGC premium payments. In total, about $12.7 billion in PRT transactions occurred during last year, with the three largest transactions (DowDuPont, International Paper, and Hartford Financial) reporting liability reductions of about $4.1 billion.
In a separate study conducted this year by “Pensions & Investments,” global pension funds plan to contribute about $32 billion to improve their funded status in 2018. Of the 58 plans surveyed, six plans could contribute more than $1 billion. Once again, the tax law change (the reduction of corporate tax rates from 35% to 21%) is causing plans to accelerate contributions to maximize tax deductions. Corporations can take advantage of this situation until September 15, 2018. In addition, the increase in the variable rate PBGC premium from $34 to $42 per $1,000 of unfunded benefits was also cited as a factor.