How company pension funds overcame their deficits last year

Company pension plans had an excellent year. The average capitalization ratio was 96.3% in 2021, down from 88.1% the previous year and the highest number on record since 2007, according to the latest Milliman report. (This figure has been updated with new data and is slightly lower than the company’s January 2022 estimate of an average capitalization ratio of 99.6%.)

But while the data was pretty impressive across the board, some strategies differentiated the best-performing company pension plans from the rest. The Milliman Report examines the funding of the 100 largest US corporate pension funds.

Funding ratios still varied widely, with Proctor & Gamble having the lowest ratio, at 70.6%, and NextEra Energy having the highest ratio, at 165.1%. Deere & Company, Eversource Energy and Delta Airlines had the largest capitalization ratio increases and saw their ratios improve by 21.3 percentage points, 19.7 percentage points and 19.4 percentage points respectively .

In general, the plans that performed better allocated more to equities and less to fixed income securities, according to the report.

“The 19 plans with equity allocations of at least 50% earned an average return of 11.9% while the 28 plans with equity allocations below 25% earned an average return of 5.2 %”, says the report.

Despite these statistics, corporate pension funds have on average decreased their allocations to equities and increased their allocations to fixed income securities. Equities now represent 29.0% of the average plan compared to 43.9% in 2008. Fixed income allocations increased to 51.2% compared to 41.7% in 2008.

The reason for this is the continued implementation of liability-driven investment strategies. The trend towards LTD has continued over the past year, albeit at a slower pace: fixed income securities as a portion of the portfolio have risen about 0.6%.

Although LTD often does not achieve returns as high as those of equity-focused strategies, plans that have engaged in LTD have also reported lower funded ratio volatility.

Discount rates also increased by 32 basis points in 2021, which contributed to a decrease in pension liabilities of 7.1%. The increase in pension risk transfers also contributed to this trend, resulting in a decrease in net liabilities of $141.6 billion. PRT dollar volume in fiscal 2021 was approximately $12.1 billion higher than fiscal 2020 dollar volume.

Company plans also saw an average return on investment of 8.4%, resulting in a $26.6 billion increase in the value of their assets, according to the report.

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Tags: Corporate pension, discount rate, funded ratio, Milliman