Trends Show Corporations Reducing Contributions to Pension Funds

With more pension funds nearing fully funded status, recent data indicates that many U.S. corporations are lowering their planned contributions to their pension funds. 

Several analyst firms have found that plans’ minimum required contributions for the 2022 plan year shrunk considerably—if not vanished altogether. 

According to Milliman’s 2023 Corporate Pension Funding Study, total plan sponsor contributions of $19.8 billion in 2022 were lower than 2021 contributions of $23.1 billion. These pale in comparison to 2017 and 2018, when plan sponsor contributions hit record highs of $60.9 billion and $58.0 billion, respectively. 

This data is based on the Milliman 100 companies, which are the 100 U.S. public companies with the largest defined benefit pension plan assets for which a 2022 annual report was released by March 10, 2023. 

Brian Donohue, a partner in October Three Consulting, also found that contributions have been trending down among 212 Fortune 500 employers that sponsor pension plans, to $13 billion in 2022 from $48 billion in 2018. 

He said he expects this trend to continue in 2023, with companies disclosing intended contributions this year of just $3 billion. 

Potential Reversal in 2024 

Michael Clark, a managing director and consulting actuary at Agilis, believes this decrease in expected contributions in 2023 is not completely due to recent funded status improvements that occurred in 2022. For many pension funds, Clark said, the funding relief provision from the American Rescue Plan Act has continued to dampen contribution requirements.  

The American Rescue Plan Act was part of defined benefit funding relief included in a COVID-19 relief bill passed in early 2021. For plans that were underfunded at the time, this bill provided a significant amount of relief during a low-interest-rate environment when pension liabilities were higher. 

“That relief continues to carry over into 2023 but might start to evaporate in 2024,” Clark said via email. “For example, a … pension plan whose minimum required contribution in 2022 was $0 won’t have any quarterly contributions due for 2023. That same plan may still have a minimum required contribution for their 2023 plan year, but it won’t be payable until September 2024.” 

Beth Ashmore, managing director of WTW’s pension business, explains that the American Rescue Plan Act gave pension plan sponsors more time to make contributions, so it provided more balance in terms of the pace of funding that was required.

Data from WTW shows, in aggregate, corporations contributed $15.6 billion and $13.8 billion in 2021 and 2022, respectively, compared to $50.8 billion and $45.7 billion in 2017 and 2018. Ashmore says she expects this trend to continue in 2023, but perhaps not for long. 

Because the American Rescue Plan Act aimed to provide relief in a low-interest-rate environment, Ashmore says this relief is no longer as useful because rates have since gone up. 

Clark predicted that many pension plan sponsors will see a “serious deterioration” in their IRS-required minimum funding status in 2023 compared to 2022, which will translate into higher contributions in the coming years. 

“While there may be a trend in smaller contributions in 2023, don’t be surprised if that trend is short-lived and reverses as early as 2024,” Clark said. 

According to Agilis, while most plans’ funded status based on current interest rates and asset values improved during 2022, if calculated using an interest-rate basis that is averaged, such as the one found in the IRS’ minimum funding rules, “the picture changes dramatically.” 

“Those valuations will use an effective interest rate that is approximately 15-18 basis points lower than they used for 2022; there is no significant rise in rates on this measure due to the long-term averaging,” an Agilis blog post stated. “This means IRS minimum funding liabilities will increase relative to 2022, even while asset values have seen significant decreases. As a result, most pension plans’ funded status on the IRS basis will drop significantly.” 

How significant this drop is will depend on each plan’s characteristics, asset allocation and “asset valuation method” for minimum funding requirements, according to Agilis. 

Could Pension Contributions Be Allocated Elsewhere? 

Ashmore argues that even if a corporation is able to lower contributions to its defined benefit plan, it does not necessarily mean that the company will want to direct extra funds into a defined contribution plan.  

“If a company says they have sufficient assets to continue to fund [a defined benefit plan], I don’t necessarily see that there’s a direct offset for a company to say, ‘I’m going to direct that money to a DC [plan] now,’” Ashmore says. “At the end of the day, [the company] is delivering the benefits that are right for them and their employee base.” 

But if a company has been making contributions to its pension plan with the purpose of shoring up a deficit, Ashmore says it is possible the company could reallocate funds it would have used for the defined benefit plan toward other benefits that need more funding, such as retiree health care. 

“It’s [important to] differentiate between the benefit strategy versus the cash flow strategy,” Ashmore says. “[Employers should ask], ‘Are we delivering the right benefits for our employers?’ Then ask, ‘Are there other sources of cash that we, as an organization, are looking for?’”