It Was Nice While It Lasted

According to Russell Investments that tracks twenty large corporate pension plans with assets greater than $20 billion, which they’ve been doing since 2005, 2019 saw the lowest combined contribution amount since 2008. The prior two years witnessed exceptionally strong contributions, as the companies received favorable tax treatment on contributions. Last year’s contribution totaled $11.9 billion compared to $28.1 billion in the prior year. Russell has estimated that 2020’s contributions should total about $13.3 billion, which includes GE’s intention to inject $4 billion or more.

But alas, the significant decline in U.S. interest rates, particularly in long bonds, and a substantial hit to assets will likely force greater contributions to be made to sure up these systems. Interestingly, despite the out-sized returns from the markets in 2019, the pension underfunding among these 20 large corporate plans grew to $151 billion from $137 billion in 2018. Combined assets were $830 billion at year end, while liabilities stood at $981 billion. The Russell organization attributed the growth in the deficit to declining interest rates. Funny, that is something that both multiemployer and public plans pretend not to notice.

While corporate pension systems have done a better job of managing their plan’s asset allocation against plan liabilities they are not immune from the market action that we’ve recently witnessed, especially since many are trying to hedge their liabilities through duration matching schemes and not the more exact approach, which is cash flow driven investing (CDI). We’d be happy to speak to you about the differences.

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