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Special Report

Low discount rates take toll on largest corporate DB plans

Funding for 100 largest U.S. corporate pension plans continues to drop

Alan Glickstein
Willis Towers Watson’s Alan Glickstein

The average funding ratio of the 100 largest U.S. corporate defined benefit plans continued to slide in 2016, dropping to 84.5% from 85.1% at the end of 2015 and 85.7% at the end of 2014, Pensions & Investments' annual analysis of corporate SEC filings shows.

The aggregate funding deficit for P&I's universe rose to $258 billion as of Dec. 31, up 5.3% from a deficit of $245 billion the previous year.

“The big story on DB plan funding is how little it's recovered from the big downturn in the recession,” said Alan Glickstein, Dallas-based senior retirement consultant at Willis Towers Watson PLC.

The average funding ratio for P&I's universe was 108.6% at the end of 2007, which plunged to 79.1% at the end of 2008 at the peak of the financial crisis.

The average discount rate used to calculate plan liabilities began to decline in 2008, dropping to 4.05% in 2012 from 6.45% in 2008. The average discount rate used by the plans in P&I's universe was 4.39% in both 2015 and 2016.

“It's fairly safe to say we're not going to see a 7% or 8% pension discount rate this year, but I certainly don't know if the new normal is 4%. There are a lot of moving parts here where conventional wisdom or recent experience suggest one thing. But these plans are going to be around for decades and until all of the benefits are paid out, you still don't know,” Mr. Glickstein said.

The funded status of corporate pension funds
The largest corporate pension plans ranked by funding ratio -- plan assets as a percentage of projected benefit obligation -- as of Dec. 31, 2016, unless otherwise noted. Dollars are in millions.
RankPension fundFair value of plan assetsBenefit obligationFunded
Plan assets
as % of
1NextEra Energy$3,651$2,474$1,177147.6%
3Bank of America$18,239$14,982$3,257121.7%
4J.P. Morgan Chase$14,272$12,216$2,056116.8%
5BNY Mellon$4,906$4,274$632114.8%
7Duke Energy$8,531$8,131$400104.9%
8WestRock Co.1$4,302$4,232$70101.6%
9PNC Financial Services$4,617$4,547$70101.5%
12 Prudential Financial$12,861$12,917-$5699.6%
13J.C. Penney2$3,455$3,473-$1899.5%
17Honeywell International$16,814$17,414-$60096.6%
18American Electric Power$4,827$5,086-$25994.9%
19Goodyear Tire & Rubber$4,972$5,285-$31394.1%
20Wells Fargo$10,120$10,774-$65493.9%
21 Southern Co.$11,583$12,385-$80293.5%
22Eastman Kodak$3,653$3,908-$25593.5%
23 Citigroup$12,363$13,271-$90893.2%
24Kraft Heinz$4,788$5,157-$36992.8%
25 Morgan Stanley (MS)$3,431$3,711-$28092.5%
27Union Pacific$3,748$4,110-$36291.2%
28Bristol-Myers Squibb$5,831$6,440-$60990.5%
32General Motors$61,622$68,827-$7,20589.5%
34Abbott Labs$7,542$8,517-$97588.6%
35Consolidated Edison$12,472$14,095-$1,62388.5%
36U.S. Steel$5,482$6,214-$73288.2%
37Emerson Electric1$4,110$4,696-$58687.5%
38United Technologies$30,555$34,923-$4,36887.5%
41Dominion Resources$7,016$8,132-$1,11686.3%
43General Mills3$5,540$6,449-$90985.9%
48Reynolds American$5,648$6,674-$1,02684.6%
50 Johnson & Johnson$23,633$28,116-$4,48384.1%
52 MetLife$9,164$10,960-$1,79683.6%
53 The Hartford$4,678$5,650-$97282.8%
57Eli Lilly$10,180$12,456-$2,27681.7%
59Huntington Ingalls Industries$4,911$6,050-$1,13981.2%
61Northrop Grumman$24,384$30,409-$6,02580.2%
64Southern California Edison$3,388$4,284-$89679.1%
65Johnson Controls1$3,293$4,169-$87679.0%
66Baxter International$4,501$5,717-$1,21678.7%
67Eversource Energy$4,076$5,242-$1,16677.8%
69DTE Energy$4,012$5,171-$1,15977.6%
73International Paper$10,312$13,683-$3,37175.4%
74 U.S. Bancorp$3,769$5,073-$1,30474.3%
75Marsh & McLennan$4,365$5,894-$1,52974.1%
81Walt Disney7$10,401$14,480-$4,07971.8%
82Dow Chemical$21,208$30,280-$9,07270.0%
84Lockheed Martin.$31,417$45,064-$13,64769.7%
86Verizon Communications$14,663$21,112-$6,44969.5%
89General Dynamics$8,980$13,022-$4,04269.0%
90Motorola Solutions$3,195$4,644-$1,44968.8%
91 DuPont$16,656$24,831-$8,17567.1%
92 Sempra Energy$2,459$3,679-$1,22066.8%
94 Harris Corp.8$4,273$6,471-$2,19866.0%
96General Electric$45,893$71,501-$25,60864.2%
97Exxon Mobil$12,793$19,960-$7,16764.1%
98United Continental Holdings$3,355$5,253-$1,89863.9%
99American Airlines$10,017$17,238-$7,22158.1%
100Delta Air Lines$10,301$20,859-$10,55849.4%
Average for 201684.9%
Average for 201585.1%
Average for 201485.7%
Notes: 1 Data are as of Sept. 30, 2016; 2 Data are as of Jan. 28, 2017; 3 Data are as of May 29, 2016; 4 Data are as of Oct. 31, 2016; 5 Data are as of May 31, 2016; 6 Data are as of July 2, 2016; 7 Data are as of Oct. 1, 2016; 8 Data are as of July 1, 2016.
Source: Company reports

Fewer negative returns

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.

Billion-dollar contributions

The plans in P&I's universe have announced expected contributions of $21.6 billion for 2017. UPS, General Electric Co., The Walt Disney Co., Delta Air Lines Inc., Pfizer Inc. and FedEx Corp. each expect to make contributions of $1 billion or more, according to their annual filings.

Aggregate assets of the top 100 plans inched up to $1.14 trillion as of Dec. 31 from $1.12 trillion the previous year. Fixed income once again had the largest aggregate share of assets at 41.6%, a slight increase from 41% at the end of 2015.

The highest fixed-income allocation in P&I's universe belonged to Goodyear Tire & Rubber Co., Akron, Ohio, which was 94.1% funded at the end of 2016 and had a 91% allocation to fixed income. The long-term pension liabilities of Goodyear's U.S. plans have been duration-matched with fixed-income securities to offset the impact of future discount-rate volatility on the plans' funded status, the 10-K said. Goodyear had $4.97 billion in assets and $5.28 billion in liabilities at the end of 2016.

Bob Collie, chief research strategist, Americas institutional, at Russell Investments in Seattle, said liability-driven investing is “not necessarily related to funded status.”

Mr. Collie said discount rate fluctuations are not the only volatility-related concern for plan sponsors and some plans are looking to offset “potential instability from volatility on the asset side.”

CBS Corp., New York, at 69.6% was not near full funding, but the plan had a 73.2% allocation to fixed income at the end of 2016. CBS had $3.24 billion in assets and $4.66 billion in liabilities at the end of 2016.

The aggregate allocation to equities dropped to 32.9% in 2016 from 34.7% the previous year. The allocation to cash remained the same at 3.6%.

Johnson & Johnson, New Brunswick, N.J., had the highest equity allocation at the end of 2016 at 70.9% of plan assets. “A majority of the company's pension funds are open to new entrants and are expected to be ongoing plans,” the 10-K said. The company was 84.1% funded in 2016, with $23.63 billion in assets and $28.11 billion in liabilities.

Drop in alternatives

The aggregate allocation to alternatives dipped slightly for the top 100 corporate plans to 17.3% from 18% in 2015, with private equity dropping to 5.1% from 5.8%, hedge funds to 4.3% from 5.3% and real estate to 4% from 4.5% the previous year. The allocation to other alternatives rose to 3.9% from 2.4% in 2015.

The Financial Accounting Standards Board in 2015 eliminated the requirement to categorize certain investments in the fair-value hierarchy, which affected the way some of the plans on P&I's list reported assets in their 2016 regulatory filings. The lack of detailed information for some asset categories might have contributed to the increase in the allocation to other investments, which rose to 4.6% in 2016 from 2.7% in 2015.

The highest funding ratio — 148% — once again was held by NextEra Energy Inc., Juno Beach, Fla. With $3.7 billion in assets and $2.5 billion in liabilities, 2016 was the company's 12th consecutive year at the top of P&I's list.

Financial services companies made up the remaining four of the five highest-funded plans.

BB&T Corp., Winston-Salem, N.C., had the second-highest funding ratio at 128.1%. Assets rose to $5.04 billion from $4.4 billion in 2015, but liabilities also increased to $3.94 billion from $3.5 billion.

Rounding out the top five, Bank of America Corp., New York, had a funding ratio of 121.7%, with $18.24 billion in assets and $14.98 billion in liabilities; J.P. Morgan Chase & Co., New York, 116.8%, with $14.27 billion in assets and $12.22 billion in liabilities; and The Bank of New York Mellon (BK) Corp. (BK), New York, at 114.8%, with $4.91 billion in assets and $4.27 billion in liabilities.

Wells Fargo & Co., Minneapolis, with $10.12 billion in defined benefit assets and $10.77 billion in liabilities, had the highest jump in funded status, rising to 93.9% from 82.8% at the end of 2015. Wells Fargo made a voluntary contribution of $1.3 billion to its U.S. defined benefit plan in August 2016, “which decreased cash and our net cash balance plan liability,” the company said in a 10-Q filed in September. The plan was frozen on July 1, 2009.

More double-digit increases

Baxter International Inc., Deerfield, Ill., also had a double-digit percentage point increase in funded status in 2016, rising to 78.7% from 68.2% the previous year. The company made a $706 million voluntary, non-cash contribution to the qualified U.S. pension plan in the second quarter of 2016, according to Baxter's 10-K. The plan had $4.5 billion in defined benefit assets and $5.72 billion in liabilities as of Dec. 31, 2016.

United Technologies Corp., Farmington, Conn., reduced its pension liabilities by roughly $768 million in 2016 through the purchase of a group annuity contract with Prudential Insurance Co. of America and by about $935 million through a lump-sum distribution to some former U.S. employees and beneficiaries who have not yet received their vested pension benefits. “These transactions reduced the assets of our defined benefit pension plans by approximately $1.5 billion,” the 10-K said. The company had a funding ratio of 87.5% at the end of 2016, with $30.56 billion in assets and $34.92 billion in liabilities.

Three airlines found themselves at the bottom of the funding spectrum in 2016.

Delta Air Lines, Atlanta, had the worst funded status in P&I's universe for the 12th consecutive year. Its plans had a funding ratio of 49.4% at the end of 2016, with liabilities of $20.86 billion and benefit payments of $1.07 billion during the year. Delta's projected pension benefit obligation was equal to 169.8% of the company's shareholder equity in 2016.

A return of 6.7% on assets along with a $1.32 billion contribution helped increase Delta's plan assets to $10.3 billion from $9.4 billion in 2015. The company contributed a total of $3.2 billion to its pension plans in March and April of this year, the company disclosed in an 8-K filing April 12. The contribution is well above the $1.2 billion the company had announced in its 10-K filing Feb. 13 that it intended to contribute to the plans in 2017 and is also above its minimum funding requirement. Delta contributed $1.2 billion in 2015 and had a funded status of 45.5%; in 2014, the company contributed $917 million and had a funded status of 42.8%.

American Airlines Group Inc., Fort Worth, Texas, was the second-lowest-funded plan on the list. With $10.02 billion in assets and $17.24 billion in liabilities, the funding ratio slid to 58.1% from 59.2% at the end of 2015. American Airlines had a 9.1% return on assets but contributed only $32 million to its plans in 2016. American Airlines expects to make supplemental contributions of $254 million to its U.S.-based plans in 2017, according to the company's 10-K.

United Continental Holdings Inc., Chicago, was third from the bottom with a funding ratio of 63.9%, with $3.36 billion in assets and $5.25 billion in liabilities. The company contributed $421 million in 2016 and expects to contribute at least $400 million to the plans in 2017, its 10-K said.

Emerson Electric Co., St. Louis, with $4.11 billion in defined benefit assets and $4.7 billion in liabilities, had the largest drop in funded status, falling to 87.5% at the end of 2016 from 103.2% a year earlier. Emerson transitioned to defined contribution plans in 2016 and closed its principal U.S. defined benefit plan to employees hired after Jan. 1, 2016, according to the company's 10-K.