You’ve probably heard of “peak oil”: the point at which global oil production reaches its high¹. Well, what about “peak pension?” (or should that be “peak DB?”) That’s the point at which corporate defined benefit pension liabilities hit their high. I’ve never heard anyone refer to it, but it’s about time they did. Because we may well have just hit it.
That’s one of the take-aways from last week’s findings about the $20 billion club (made up of the U.S corporations with the biggest pension liabilities) and an excellent follow-up piece by Justin Owens, which sets out how those corporations have responded to the growth in risk their pension liabilities represent. Taking a look at one of the charts in the research (shown below) Jim Gannon’s first reaction was: “we’ve probably hit the high for liabilities.” Jim is Russell’s director of asset allocation and risk management.
A breakdown of the change in the value of the liabilities of the $20 billion club, 2005-2012
His reasoning was based on the fact that interest cost and benefit accruals both add to liabilities each year, while benefit payments and other flows reduce them. Actuarial gains and losses can go either way, mainly depending on interest rate movements. Expected benefit payments in 2013 – according to the 2012 10-K filings – are larger than the expected interest cost plus benefit accruals. That’s before any allowance for settlement activity (such as GM’s purchase of a bulk annuity contract in 2012), which will only serve to accentuate the effect. So the only real “if” here – and it’s a big “if” – is to do with actuarial gains/losses. In 2012, liabilities went up because discount rates fell. If that happens again, 2012 may not be peak pension after all. But the balance of probabilities is against that, and any increase in interest rates will serve to push liabilities down further.
So the $915 billion liability at the $20 billion club – which implies the total worldwide pension liability for all U.S.-listed corporations is roughly $2.3 trillion – may be as high as it will ever get.
Now, Jim’s observation might be a little bit scary for the many readers of this blog who work for investment managers whose main client base is corporate pension plans. But before you all rush off and find alternative careers (whether at a nonprofit organization, an insurance company, a public plan, or simply growing organic carrots), I should hasten to point out assets have some way to go before they catch up with liabilities, so the peak value of pension assets probably still lies in the future. That said, peak pension seems to me to be an event worth noting.
¹Naturally, different sources use different definitions and reach different conclusions about whether this peak is behind us, ahead of us, or right about now.