Buoyed by large contributions as a result of tax reform, U.S. corporate defined benefit plans continued the trend in 2018 of devoting a greater share of their portfolios to fixed income.
As funding improved and glidepath targets were hit, plans particularly increased allocations to liability-driven investing, Pension & Investments' latest survey of the 1,000 largest U.S. retirement plan sponsors shows.
Overall, among U.S. defined benefit plans of the largest 200 plan sponsors, domestic fixed-income assets totaled $967.4 billion as of Sept. 30, a 10% increase from a year earlier. The increase stands in stark contrast to the Bloomberg Barclays U.S. Aggregate bond index return for the same period at -1.22%.
Among the DB plans in the top 200, LDI strategies accounted for $94.1 billion in assets as of Sept. 30, up from $78.9 billion reported a year earlier.
Among corporate DB plans in the top 200, there was a further shift to domestic fixed income as a whole, not just in LDI strategies, with an average asset allocation to domestic fixed income at 43.4% as of Sept. 30, above the 38.8% average allocation a year ago.
United Parcel Service Inc. reported the highest asset total in LDI strategies at $15.6 billion as of Sept. 30, about double the $7.9 billion reported as of Sept. 30, 2017, and comprising 37.8% of its $41.25 billion in U.S. DB plan assets.
The increase in LDI assets for the Atlanta-based shipping company came on the heels of $7.3 billion in contributions to the U.S. pension plans in 2017. Like similar companies that accelerated contributions to their defined benefit plans in 2017 and 2018, UPS said it had done so to take advantage of the 35% corporate tax rate deduction before the Tax Cut and Jobs Act's lowering of the tax rate to 22% would take effect.
Through those massive contribu- tions, UPS improved the funding ratio of its U.S. pension plans to 91.5% at year-end 2017, compared to 76% a year earlier, according to the company's most recent 10-K filing.
Carter Holcombe, portfolio manager for UPS' group trust, said in a telephone interview that the improved funded status, paired with the impending freeze of UPS' largest defined benefit plan at the end of 2022, motivated the increase in LDI assets.
"The plan's really healthy right now," Mr. Holcombe said. "We're not targeting hibernation immediately on the freeze date. I think we're focused just on making the plan as healthy as possible as it's sunsetting."
Mr. Holcombe said a large portion of the assets from the giant contribution were moved into LDI, adding while the company is "planning on immunizing the plan" on the date it freezes, much of what UPS will do depends on market conditions beyond that date. The plan does not have a specific glidepath, he said.
The UPS Retirement Plan for non-union employees, the plan being frozen, accounts for about half of UPS' total DB plan assets, Mr. Holcombe said. UPS announced in June 2017 that the plan would freeze benefit accruals as of Jan. 1, 2023.