Sponsors of the 20 largest corporate pension funds entered the fourth quarter in 2018 poised for a banner year, as strong equity markets, rising interest rates, and billions in discretionary cash contributions pushed the aggregate funding level to 90 percent, a level not seen in a decade.
But after positive returns in the first three quarters of 2018, the S&P 500 ended up down nearly 7 percent, the first time in history the index took a loss for a year in which it saw gains in the first three quarters. The S&P shed nearly 8 percent in December, the worst performance for the month since 1931.
All told, global equities lost 13 percent in value in Q4, negating most of the largest pensions’ growth in funded ratios for the year, according to Russell Investments’ annual $20 Billion Club report, which tracks pensions with $20 billion or more in liabilities.
The aggregate funded ratio for the end of 2018 was 85.3 percent, up from 84.4 percent at the beginning of the year. The total funding deficit was $137 billion at the end of the year, the lowest level since 2013, according to Russell’s report. All told, the plans hold $896.6 billion in liabilities.
The plans did shed $20 billion in liabilities over the year, as actuarial assumptions benefited from a 60-to-70 basis point increase in discount rates.
And plans continued making aggressive discretionary cash contributions. The $28.1 billion in contributions was $6 billion more than Russell had projected at the beginning of the year, and was the third highest contribution rate in recent years. Sponsors pumped $37.5 billion into plans in 2017, motivated by higher write-offs before the Tax Cuts and Jobs Act slashed the corporate tax rate from 35 percent to 21 percent.
Of the 20 plans in the $20 billion club, 75 percent made contributions greater than $1 billion in 2017 and 2018.
But the window to make contributions against the higher tax rate has closed, leaving sponsors with little appetite to continue the cash infusions.
“For most of these sponsors, funding requirements in U.S. DB plans are at or near zero,” writes Justin Owens, director, client strategy and research, and author of Russell’s report.
Owens says 2019 contributions may drop to their lowest level in 15 years. Annual filings to date show only $8.5 billion in expected contributions.
General Electric made a $6.8 billion contribution in 2018, the largest among the $20 billion club. GE invested nearly $10 billion between 2017 and 2018, helping to push its funded ratio from 67 percent to 75.6 percent.
Lockheed Martin contributed $5 billion; FedEx $2.6 billion; Raytheon $2.1 billion; and General Motors and Dow Chemical contributed $1.7 billion.
The 20 plans paid $54.1 billion in benefits from $759.5 billion in aggregate assets. They assumed $13.5 billion in new benefit accruals. The improved discount rates saved the plans $56.3 billion in liability costs.
Russell also notes the continued trend of risk transfer deals. FedEx and MetLife inked a transfer that moved $6 billion in liabilities off the plan’s books, the largest deal in six years.
Lockheed Martin shed about $2.5 billion in liabilities in a deal with Prudential and Athene, affecting nearly 40,000 retirees. That deal included an annuity buy-in purchase, wherein Lockheed will continue to pay benefits directly, but will ultimately be reimbursed under the contract.
The buy-in structure is more common in Europe, and may signal a new strategy other U.S. pensions will consider, according to Russell’s report. READ MORE: