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Defined Benefit

Companies pump up pensions in bid to reduce costs, boost funding

Dan Kutliroff of Northern Trust Asset Management
Northern Trust’s Dan Kutliroff said reduced pension expense have prompted companies to manage pension plans differently.

Corporations are allocating more capital to pension plans not only to improve funded status but also to reduce pension expense, said Dan Kutliroff, senior vice president, head of solutions strategy at Northern Trust Asset Management, Chicago.

"We think it's critical in our experience," Mr. Kutliroff said. "Just to be clear, when we use the term pension expense we're talking about the impact to the income statement, the accounting, (how) the pension plan is impacting the total earnings the company discloses."

A July report co-authored by Mr. Kutliroff, and Brad Nelson, associate strategist and Sarvesh Soi, pension risk strategist, both at NTAM, said that during 2017, the 346 corporations in the S&P 500 with pension plans contributed $77 billion in cash into those plans, which brought the average pension expense to 3.4% of total operating income, down from 5.2% in 2016.

"That's one of the critical elements that have driven corporations to manage their pension plans differently," Mr. Kutliroff said.

The primary drivers for pension expense getting lower are lower benefit accruals (because with closed and frozen plans, retiring workers are not being replaced by new participants), assets outpacing liabilities, thanks to those large contributions, and smaller unrecognized actuarial losses.