It’s natural to be curious about what others are doing; that’s why our $20 billion club updates are some of Russell Investments’ most-read research pieces. Following the recent update on plans’ experience in 2016, Justin Owens has taken a closer look at the strategies being used by this select group of large plan sponsors to manage pension cost and risk.
Setting the trends that the industry follows
The $20 billion club is our name for 19 of the U.S.-listed corporations with the largest worldwide pension liabilities. With combined liabilities in excess of $900 billion, the club represents around 40% of the total pension liability of all U.S.–listed corporations. As Justin notes, these sponsors “don’t follow industry trends—they set them.” And the big trend is to use every available means in order to manage the cost and risk of their DB plans.
A plan sponsor’s pension management toolbox has long contained the tools of plan design, funding policy and investment policy. In recent years, risk transfer has been added to that list. Under those general headings, notable policy moves highlighted in the paper include:
Plan design: sponsors continue to adjust, reduce, or eliminate DB benefits by adopting hybrid plan designs (often cash balance plans), closing plans to new entrants or freezing benefit accruals to manage and reduce pension costs. In 2016, UPS, DuPont and Lockheed Martin each either announced or implemented a plan closure or a freeze of new benefit accruals.
In 2016, the average service cost for these 19 corporations (i.e. the value of new benefits that accrued) was 1.75% of their total projected benefit obligation, almost 1% lower than it was ten years ago.
Funding policy: 2016 contributions of $18 billion were some $5 billion more than 2015’s, but only marginally more than the cost of new benefit accruals. Funding policy varied significantly between the corporations: many continue to take advantage of funding relief and contributed only the statutory minimum requirement, while others made substantial discretionary contributions in order to improve funded status. GM, for example, made $2bn of discretionary contributions (financed by a 2015 debt issue), and FedEx issued $1.2bn of debt, of which $1bn is to be contributed to the pension plan.
Investment policy: I noted a year ago how the pension herd had broken up and that there were significant differences in just about every aspect of investment strategy. One common theme, however, has been the shift from an asset–only focus to an asset–liability focus. Since 2010, at least six of the 19 sponsors have shifted 10% or more of their portfolio to fixed income from return–seeking assets. The biggest policy change in 2016 was IBM’s fixed income allocation target increasing from 56% to 70%.
Risk transfer: DB sponsors are pursuing annuity purchases, especially to retirees with small benefits, in addition to ongoing lump sum window offers. The desire to reduce PBGC premiums and to base lump sum payments on the existing mortality assumptions (which are scheduled to be updated in 2018) provide incentive for these transactions. Significant lump sum cash outs (ranging from $550mn to over $1bn) were carried out by United Technologies, Verizon Communications, UPS, and DuPont. United Technologies also undertook a $775 million annuity purchase for approximately 36,000 plan participants whose benefits are below $300 a month.
As the U.S. private sector retirement benefit policy continues to shift to defined contribution, the way in which the roughly $3 trillion of private defined benefit assets is being managed is also shifting. In every policy area, significant steps are being taken to reduce the cost and risk of these plans.