Corporate pension plans had a good year in 2013. The Milliman 2014 Pension Funding Study reported a $198.3 billion improvement in the funded status deficit during 2013. This improvement was due to a win-win situation where there was a 7.5% decrease in plan liabilities from higher discount rates and a 9.9% average return on plan assets.
There are a few interesting pieces of information that can be gleaned from the Pension Funding Study about plan sponsors that have made moves to de-risk their pension plans.
• In general, the asset allocations of the plans in the study have shifted toward a higher allocation of fixed income investments. However, some plan sponsors have retained a more traditional asset mix.
• In 2013, plan sponsors with higher allocations to equities experienced greater improvement in pension funded status than those with lower exposures to equities.
• Some plan sponsors who undertook de-risking activities such as lump sum payouts or annuity purchases may need to increase cash contributions to maintain funded status.
- For example, Ford was one of the companies that undertook de-risking activities in 2012. Its 2013 contribution increased by more than $1.6 billion.
• There are 22 pension plans in the Milliman 100 index that had asset allocations to fixed income investments over 40% in 2009. Since 2009:
- These 22 plans experienced significantly lower funded ratio volatility than the other 78 plans.
- From 2010 through 2012, these plans earned higher average annualized returns.
- Until 2013, this strategy paid off for these plans in terms of reducing funded status volatility.
• For the plans that did not increase asset allocations to fixed income investments, the combination of higher interest rates to discount liabilities with favorable returns on assets led to a significant improvement in their funded ratios.
What are the morals of the story? De-risking pension plans may provide advantages to plan sponsors in reductions in funded status volatility. But these advantages may come at the price of higher cash contributions and missing out on favorable moves in the market.