Largest DB Plans Move to Fixed Income and Continues to Derisk

According to the latest report from Russell Investments about the largest corporate defined benefit (DB) plan sponsors in the United States, they are uniquely situated to set the trends that the rest of the industry often follow.

Based on its analysis of the FYE 2018 annual filings, these corporations continued to make changes to their pension plan policies to take more control of the costs and to better manage their risks.

As for investment policy, the analysis finds over the last several years, the $20 billion club (the group of 20 publicly listed U.S. corporations with pension liabilities in excess of $20 billion) has been shifting from the traditional asset-only focus to an asset-liability focus. During 2018, the $20 billion club shifted asset allocations significantly away from risky assets and into fixed income. On average, equity allocations were down 5% and fixed income allocations were up 5%, which was the highest de-risking movement in the past eight years.

However, Russell Investments says it’s worth keeping in mind that most plans will be under exposed to equities because of the very difficult fourth quarter in 2018. This may cause the appearance of a conscious allocation to fixed income; but, in reality, plan sponsors just haven’t rebalanced to targets. Still, plan sponsors have sited specific intent to de-risk.

Regarding benefits strategy, the analysis finds that since the Pension Protection Act of 2006 (PPA), large DB plan numbers have been on the decline, both in total count and head count. Almost all $20 billion club member plans are closed to new entrants, frozen altogether, have offered a lump-sum offer window and/or have made some form of annuity purchase.

As for funding policy, Russell Investments notes that following the implementation of PPA in 2008, which coincided with the global financial crisis, plan sponsors faced rising contribution requirements. However, plan sponsors began to contribute less as the contribution requirements dwindled thanks to multiple rounds of legislation that incorporated pension funding relief. Included in these funding relief initiatives were large increases in the Pension Benefit Guaranty Corporation (PBGC) variable rate premiums. Combining the low contribution rates, PBGC premium increases, and an expected update in prescribed mortality assumptions, led plan sponsors to increase discretionary contributions above their minimum required amounts (in many cases this was zero). 

In 2017 and 2018, the $20 billion club posted record contribution amounts—over $65 billion over the two years—mostly to take advantage of the tax deductions that were reduced because of the Tax Cuts and Jobs Act of 2017. In most cases, these contributions appear to be accelerations of future contributions as the actual 2018 contributions were higher than expected and now the expected 2019 contributions are at historical lows.

“The low interest rate and return environment persists and sponsors continue to focus on areas within their control, such as benefit, funding and investment policies. By improving plan funded positions and taking steps to minimize portfolio risks, sponsors will help promote stability, reduce surprises and place the sponsors in control of where their DB plans go,” the report concludes.