$20B Club Plans’ Funded Statuses Declined Slightly in 2023

In a departure from two consecutive years of growth, the largest pension plans among publicly listed U.S. corporations faced a slight decline in their average funded status in 2023, revealed Russell Investments’ annual analysis. The study focused on 21 corporations historically managing more than $20 billion in pension liabilities, collectively known as the “$20 billion club.”

The group represents approximately 40% of all pension and liability assets of U.S. listed corporations; it experienced a funding deficit increase to an average of $43 billion in 2023 from an average of $30 billion in 2022.

Justin Owens, Russell Investments’ senior director and co-head of strategic asset allocation, attributed the decline in funded status to various factors, including risk transfer, plan closures and plan freezes. Owens emphasized that total liabilities increased due to a decline in discount rates and higher interest costs than in previous years.

“Despite ongoing effects of risk transfer, plan closures, and plan freezes, total liabilities were still up,” Owens said in a statement. “The net effect was a slight decline in funded ratio for the $20 billion club, with assets inching downward and liabilities inching upward.”

Russell Investments also highlighted a downward trend in employer contributions, which reached their lowest point in 19 years of data tracking for this group. Contributions in 2023 were 25% below the high point recorded in 2017. Owens noted that companies’ expectations for 2024 indicated little appetite to contribute beyond government requirements.

The research follows on the heels of IBM’s wave-making decision in November 2023 to end its 401(k) employee matching program in favor of an automatic 5% retirement benefit account, a cash balance plan regulated like a DB plan. Unlike many of the companies in Russell’s report, IBM had an overfunded pension plan that it could not use for its 401(k) benefits plan but can use for the new cash balancer plan. Despite the average funding dip year-over-year in Russell’s report, the average funded status for each corporation over the past three years remained close to the 100% threshold, a milestone not seen since 2007, the firm noted.

Another unexpected shift was an increase in the average expected return on assets assumptions for the first time since the inception of the $20 billion club in 2011. Owens pointed out that the decline in EROA assumptions in recent years resulted from increased liability-hedging fixed income in defined benefit portfolios and decreased expected returns on fixed income.

“Expected returns on fixed income are much higher than they have been,” Owens said. “Most of these companies (13 of 21) chose to increase expected return assumptions for accounting purposes, some quite dramatically. For these companies, a higher EROA assumption would lead to lower pension expense (or higher pension income) disclosed on the corporate income statement.”

Other key findings in the analysis included:

• Liabilities (projected benefit obligations) rose to $708.5 billion at the end of 2023 from about $700 billion in 2022, the first increase since 2009;
• Assets, on the other hand, declined to $665.6 billion at the end of 2023 from $672 billion at the end of 2022, marking the first time they have sunk lower than $700 billion since 2011; and
• Deficits, representing excess assets above or below liabilities, totaled $42.9 billion at the end of 2023, compared to $29.6 billion at the beginning of the year. Contributing factors included actuarial loss of $23.1 billion partially offset by investment returns minus interest cost $10.6 billion.

“Understanding trends among [the $20 billion club] will help all DB sponsors in their fiduciary duties,” Owens said. “Looking at the latest corporate disclosures gives sponsors the perspective and broad-stroke trends in the corporate pension industry.”