Pension Funding Fortunes Riding a Yo-Yo

The wild ride that financial investments have been on lately has become manifest in yet another way: the vagaries of pension plan funding levels. Two reports on funding ratios bear out the volatility.

Days shorten and light is in shorter supply (in the northern hemisphere, at least) as a year draws to a close – an apt metaphor in 2018 for pension plan funding, if the funding levels of the 20 largest corporate pension plans are any indication. The fourth quarter of 2018 squelched the luster of the first three, reports Russell Investments Director of Client Strategy & Research Justin Owens.  He says that those plans “felt the wind at their backs” for the first three quarters, but things changed dramatically in the fourth.

That’s when, Owens says, global equities lost 13% of their value. And that, he says, “negated much of the growth in funded ratios,” which Russell Investments reports ended up rising by an average of 0.9 percentage points for 2018, from 84.4% to 85.3%.

The figures may not have been even that good, however, were it not for Lockheed Martin and General Electric pumping such large contributions into their plans that their funded ratios improved by 6% and 4%, respectively. And actually, they were not alone, Owens suggests, writing that many pension plan sponsors made discretionary contributions in 2017 and 2018.  He called those contributions “opportunistic and strategic” and said that they reflected sponsors’ desire “to take advantage of the relatively high tax deduction before new corporate tax rates took effect” after the enactment of the Tax Cuts and Jobs Act of 2017.

But what a difference a few months makes. Nature totally ignored Punxatawney Phil’s prediction of an early Spring, with snow in many places, but pension plan funding at least heated up in February. Milliman reports that the funded status of the 100 largest corporate pension plans improved by $20 billion that month. The funded ratio for those plans, says Milliman, improved by 1.2 percentage points and ended up at 92.6% by the end of February.

Deficits Drop

Both reports did agree on one thing: Pension plan funding deficits fell during the periods they covered.

Owens said that in the fourth quarter of 2018, the funding deficit of the 20 largest corporate pension plans fell, dropping by $20 billion by year’s end to $137 billion. And Milliman said that for the 100 plans it measured, the deficit shrank by $45 billion just since the start of 2019.