While every pension plan has its own unique set of circumstances, a new analysis
by the BNY Mellon Investment Strategy and Solutions Group (ISSG), finds that financial services, energy and consumer staples have the best funded defined benefit plans.
Financial services firms, which had an average funded status of approximately 94%, also as a group had the lowest requirement to fund their plans, according to ISSG. According to a press release, financial services companies tended to have higher-than-average allocations to equities, even though well-funded plans in other business sectors had higher allocations to fixed income and liability driven investing strategies.
At the other end of the spectrum, IT companies tended to have the lowest funded status, with the firms in that sector posting an average funded status of approximately 77%, ISSG said. The health care sector did slightly better with an average funded status of approximately 82%, the report said.
Different companies have varying abilities to take on risk, such as allocating a higher portion of their plan assets to more aggressive and volatile asset classes, ISSG notes. This ability to take on risk, according to ISSG, is based on three key factors:
- the size of the pension plan compared to the size of the company,
- cash that must be contributed to pension plans compared to free cash flow, and
- pension expense compared to operating income.
Based on these factors, ISSG notes that utilities, materials and telecommunications companies have the least ability of the companies that were part of the analysis to take on risk within their pension plans.
The analysis was based on an analysis of 931 public companies, which were broken down into the following sectors: consumer discretionary (117), consumer staples (67), energy (57), financials (164), health care (60), industrials (199), IT (76), materials (108), telecomm (10) and utilities (73). Funded status for each sector was determined by first calculating the funded status (fair value of plan assets/projected benefit obligation) for each company within the sector with and then taking the median of these values. The bottom and top 2.5% of values were excluded. The information used for the analysis comes from publicly available sources that have not been independently verified.
The BNY Mellon Investment Strategy and Solutions Group is a division of The Bank of New York Mellon.