Could DB Plan Sponsors Have Seen a Greater Funded Status Increase in 2019?

Contributions to large pension plans plunged in 2019, nearly matching their lowest point in the past 15 years, according to Russell Investments’ tracking of a group of 20 publicly listed U.S. corporations with pension liabilities in excess of $20 billion.

Dubbed the $20 billion club, these large plans saw contributions in 2019 similar to 2008, amid the global financial crisis.

Sources that keep track of defined benefit (DB) plan funded status found that, despite strong equity returns during 2019, most DB plan sponsors likely saw only a small improvement to their plan’s funded status over the year. The funded status of the nation’s largest corporate pension plans edged up slightly in 2019 as historically low interest rate levels mostly offset the strongest investments gains witnessed by plan sponsors since 2003, according to an analysis by Willis Towers Watson.

Russell Investments’ annual analysis of the $20 billion club, which represents nearly 40% of all pension and liability assets of U.S. listed corporations, also shows discount rates plunged due to a combination of Treasury rates declining and spreads tightening. Total liabilities on the $20 billion club’s collective balance sheet increased again in 2019 to $981 billion, up from a previous peak in 2017 of $975 billion. It also found investment returns achieved the highest dollar return in investments since the $20 billion club analysis began, achieving $125 billion for the group in 2019.

Yet contributions dropped drastically from $28 billion in 2018 to $12 billion in 2019, following a two-year boom motivated by U.S. federal tax reform. “With funding relief reducing or eliminating contribution requirements for many plan sponsors, they find little motivation to contribute more than required,” says Justin Owens, director, Investment Strategy & Solutions at Russell Investments. “The net effect of all of this is that funded status stayed roughly the same for the $20 billion club, likely frustrating sponsors who saw assets increase without a corresponding increase in funded position.”

In his February Pension Finance Update, Brian Donohue, partner at October Three Consulting, says, “Pension funding relief has reduced required plan funding since 2012, but under current law, this relief will gradually sunset. Given the current level of market interest rates, it is possible that relief reduces the funding burden through 2028, but the rates used to measure liabilities will move significantly lower over the next few years, increasing funding requirements for pension sponsors that have only made required contributions.”