Asset Allocation Made the Difference for Corporate Pension Funding in 2021

Plans with higher equity and lower fixed income allotments outperformed.

Corporate pension plans had a great year. The average funded ratio was 96.3% in 2021, up from 88.1% the previous year and the highest number on record since 2007, according to the most recent Milliman report. (This figure has been updated with new data and is slightly lower than the firm’s January 2022 estimate of a 99.6% average funded ratio.)

But while the data has been quite impressive across the board, certain strategies differentiated more successful corporate pensions from others. The Milliman report considers funding of the 100 largest U.S. corporate pension funds.

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Funded ratios still varied considerably, with Proctor & Gamble having the lowest ratio, at 70.6%, and NextEra Energy having the highest, at 165.1%. The plans with the highest funded ratio increases were Deere & Company, Eversource Energy, and Delta Airlines, and saw their ratios improve by 21.3 percentage points, 19.7 percentage points, and 19.4 percentage points respectively.

In general, the plans that performed the best allocated more to equities and less to fixed income, according to the report.

“The 19 plans with equity allocations of at least 50% earned an average return of 11.9% while the 28 plans with equity allocations below 25% earned an average return of 5.2%,” states the report.

Despite these statistics, corporate pension funds have on average decreased their allocations to equities and increased their allocations to fixed income. Equities now account for 29.0% of the average plan as opposed to 43.9% in 2008. Fixed-income allocations have increased to 51.2% from 41.7% in 2008.

The reason for this is the ongoing implementation of liability-driven investment strategies. The trend toward LDI continued this past year, albeit at a slower pace: Fixed income as a portion of the portfolio increased by approximately 0.6%.

While LDI often does not achieve returns as high as those of equity-driven strategies, the plans that engaged in LDI also reported lower funded ratio volatility.

Discount rates also increased by 32 basis points in 2021, which helped contribute to a decrease in pension obligations of 7.1%. Increased pension risk transfers also contributed to this trend, leading to a net liability decrease of $141.6 billion. The dollar volume of PRTs in FY2021 was approximately $12.1 billion larger than the dollar volume in FY2020.

Corporate plans also saw an average investment return of 8.4%, leading to an increase of $26.6 billion in the value of their assets, according to the report.

New Limits for HSAs to Account for Inflation Growth

The limit for individuals with self-only coverage will increase by $200, and the limit for those with family coverage will increase by $450.

The IRS has published the 2023 contribution limits for health savings accounts.

With the latest update of the U.S. Consumer Price Index showing a sizeable spike in the inflation rate to 8.5%—the largest 12-month increase since 1981—the new IRS limits represent a larger hike than seen in recent years. 

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For calendar year 2023, the annual limitation on deductions for an individual with self-only coverage under a high-deductible health plan is $3,850, up $200 from this year’s limit. The annual limitation on deductions for an individual with family coverage under an HDHP is $7,750, an increase of $450 from the 2022 limit.

The limit for individuals was only increased by $50 going into 2022 from 2021, and by $100 for families.

The IRS defines an HDHP for calendar year 2023 as a health plan with an annual deductible that is not less than $1,500 for self-only coverage or $3,000 for family coverage, and for which annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) do not exceed $7,500 for self-only coverage or $15,000 for family coverage.

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