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Will DB Contributions Continue to Ride High?

Practice Management

Private sector pension plan contributions were exceptionally high in 2017 and 2018, but may not remain so this year, say recent analyses.

The 20 largest corporate DB plans just had “two of the strongest years ever for pension contributions,” writes Russell Investments’ Director of Client Strategy & Research Justin Owens, but that may not continue in 2019.

Contributions have been high, Owens says, due to:

  • changes in funding requirements as funded status suffered in the wake of the Great Recession;
  • funding relief eased that eased the burden of new funding requirements;
  • strategies to take advantage of tax deductions for contributions before deductions changed under the Tax Cuts and Jobs Act (TCJA) enacted at the end of 2017;
  • increasing contributions as a way to lessen the effect of rising Pension Benefit Guaranty Corporation (PBGC) premiums; and
  • an effort to add more to pension funds now in anticipation of future changes to contribution requirements.

The greatest single factor, says Owens, was the TCJA, since while it cut corporate tax rates it also reduced the deduction for qualified retirement plan contributions. Calendar year plans could only avail themselves of the older, higher deduction before Sept. 15, 2018, with the result being that “sponsors took advantage of a window of opportunity to accelerate contributions under a higher tax deduction,” he says.

Scott Jarboe, a partner at Mercer, agrees. He told Pensions & Investments that “it made sense” for plan sponsors to take advantage of deductions that were in effect before the TCJA provisions concerning the deduction for contributions became effective. Wilshire Consulting Managing Director Ned McGuire made similar remarks, noting that with the 14 percentage point drop in the tax rate, “plans took advantage of that tax differential to prefund as many years as possible at the highest possible rate.”

2019 Contribution Crystal Ball

Estimates for 2019, Owens writes, are that contributions by those 20 biggest corporate DB plans will be more than 75% lower than they had been only recently. He reports that their contributions in 2019 are expected to be $8.5 billion collectively, only $1.7 billion higher than General Electric’s 2018 contribution to its pension plan of $6.8 billion. Willis Towers Watson PLC Philadelphia office Managing Director Royce Kosoff also has remarked that he expects contributions in 2019 to be lower.

And pension contributions will be lower in 2019 than they were in 2018 among 46 companies Pensions & Investments analyzed. In 2018, they say, 10 of them contributed nearly $1 billion or more to their pension funds; this year, two expect to hit that level.

Owens adds that it is possible that actual contributions may exceed his firm’s projections, and notes that there still are “many sponsors” that seek to increase their plans’ funding quickly. Securities and Exchange Commission filings bear that out. Exxon Mobil Corp. and United Parcel Service reportedly told the SEC they plan to increase their respective pension contributions from the 2018 levels of $490 million and $19 million to $1.02 billion and $2 billion in 2019. And like Owen, Kosoff sees increasing PBGC premiums as a catalyst for pension contributions, a phenomenon he thinks will continue in 2019.

Still, Owens writes, “there is no obvious catalyst for contribution levels like we have seen the last couple years.”