The average return on plan assets bounced up to 6.5% in 2016 from 0.11% in 2015 and only three of the 100 plans in P&I's universe reported a negative return on plan assets in 2016. Sixty-two plans reported a negative return in 2015.
The Russell 3000 index gained 12.74% for the year, while the S&P 500 index returned 11.96%. International equities did not fare as well, with the MSCI World ex-U.S. index returning -0.13%.
Long-duration U.S. government securities performed well in 2016, with the Bloomberg Barclays U.S. Long Government/Credit Bond index returning 6.67%. The Bloomberg Barclays U.S. Aggregate Bondindex returned 2.65% and the Bloomberg Barclays Global Aggregate ex-U.S. index returned 1.49%.
The average long-term assumed rate of return on plan assets continued a declining trend in 2016. The average declined to 7.21% from 7.32% in 2015, 7.51% in 2014, 7.55% in 2013, 7.73% in 2012 and 7.94% in 2011.
“Companies are expecting less from their assets. That has been a downward trend over the last five years that we've been tracking. In the end, they are going to need more in contributions to become fully funded,” said Justin Owens, director, client strategy and research at Russell Investments in Seattle.
Aggregate contributions by the plans in P&I's universe rose in 2016 to a total of $32.28 billion after years of decline. (The aggregate figure includes global contributions when U.S.-only contributions were not available.) Contributions were $21.8 billion in 2015, $28.4 billion in 2014, $31.7 billion in 2013 and $47.4 billion in 2012. Congress reduced minimum required contributions in 2012 through the Moving Ahead for Progress in the 21st Century Act, which allowed plan sponsors to use a 25-year average interest rate to determine plan liabilities. The Highway and Transportation Funding Act of 2014 extended the minimum contribution relief through 2017 and the interest-rate allowance through 2021.
“A reliable way to change your funded status is to contribute to the plan. In 2015, contributions were below service cost. They were higher (than service cost) in 2016, but only slightly higher,” Mr. Owens said.
United Parcel Service Inc., Atlanta, was the top contributor for the year, putting $2.48 billion into its plans in 2016, and the company expects to contribute $2.3 billion to its pension plans in 2017. UPS had $31.22 billion in assets, $41.07 billion in liabilities and a funding ratio of 76% in 2016.
UPS also made a lump-sum offering in the fourth quarter of 2016 to former U.S. employees who terminated their employment between July 2003 and June 2016. About 22,000 participants accepted the offer, “accelerating $685 million in benefit payments during 2016 while reducing the number of participants who are due future payments from U.S. pension plans,” according to its 10-K filing with the Securities and Exchange Commission.
Exxon Mobil Corp., Irving, Texas, contributed $2.07 billion in 2016 and announced contributions of $560 million to its U.S. pension plans in 2017. Exxon was the second-worst-funded plan on P&I's list at the end of 2015 at 56.1%, but the funding ratio improved to 64.1% a year later. The company had $12.79 billion in assets and $19.96 billion in liabilities at the end of 2016.
General Motors Co., Detroit, contributed $2.05 billion to its U.S. plans in 2016, which was funded by the issuance of senior unsecured notes, according to its 10-K. GM's liabilities dropped to $68.8 billion from $71.5 billion at the end of 2015, and its funding ratio increased to 89.5% from 85.4%. The plans had $61.6 billion in assets at the end of 2016.