Rising assets and falling liabilities yielded a drastic improvement for the 2013 balance sheets of the "US$20 billion club," the 19 publicly listed US corporations with pension liabilities in excess of US$20 billion, according to an analysis conducted by Russell Investments.
Thanks to a drop in interest rates in 2013, the US$20 billion club — which represents nearly 40% of all pension and liability assets of U.S. listed corporations — saw a sharp drop in its pension deficit, which fell from US$220 billion to US$114 billion, the best position in six years.
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In addition to increased interest rates, 2013’s turnaround can be attributed to strong equity market returns and higher plan sponsor contributions.
2012 likely represented the highest level that the US$20 billion club’s collective pension liabilities would ever reach — US$915 billion or "peak pension."
In 2013, the median discount rate used to value US plan liabilities — which had fallen from 6.4% to 4.0% in the previous four years — rose to 4.89%, an increase of almost 0.9%. This trend reversal accounted for a gain of some US$69 billion.
This improved position is affecting how corporate pension plans are being managed, because with smaller shortfalls and smaller contributions there is less appetite for investment risk among pension plan sponsors.
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By GlobalDataBob Collie, chief research strategist for Americas Institutional, said: "The events of the last six years have increased the appetite of sponsors to run their plans differently — more liability-focused, less peer-sensitive and more risk-averse. But some of the changes that this implies were hard to implement in the face of big pension deficits and when interest rates were at record lows. 2013 made them easier."
As the analysis shows, when pension plans were in deficit, plan sponsors were forced to inject significant cash contributions in order to make up for any shortfall. Even a year ago, contribution requirements appeared set to remain high for several more years.
Since a large chunk of the deficit was reduced in 2013, the 2014 expected contributions disclosed in corporate financial statements are around 40% lower than the levels of 2009-2013.
Additionally, while the general trend toward de-risking slowed in 2012 for the US$20 billion club, Russell expects interest in liability-driven investing strategies to increase going forward, as corporations seek to preserve funded status gains.
Collie added: "The size of the $20 billon club’s improvement in funded status in 2013 means that asset allocation moves — whether due to formal liability-responsive asset allocation policies or simply the re-evaluation of strategy — may be in some cases significant. Longer term, there will also be a growing emphasis on defined contribution and a shift away from defined benefit."
