A higher average discount rate lowered liabilities for the 100 largest U.S. corporate defined benefit plans in 2018, but that funding advantage was mostly offset by negative returns for plans with a reporting date of Dec. 31, Pensions & Investments' annual analysis of Securities and Exchange Commission filings shows.
The average discount rate used by the plans in P&I's universe rose to 4.25% in 2018, up 57 basis points from one year earlier, contributing to an aggregate $117.3 billion drop in pension liabilities.
However, only three of the 86 plans with a reporting date of Dec. 31 showed a positive return in 2018. The average return on plan assets for the 100 largest plans plummeted to -3.53% from 12.27% one year earlier, while the average return for plans with a reporting date of Dec. 31 was -4.6%. The aggregate fair value of assets dropped 6.5% to $1.164 trillion in 2018 from the previous year's $1.245 trillion.
In contrast, all 100 of the plans in P&I's universe reported a positive return in 2017 and 87 plans had double-digit returns for the year. In 2016, 97 plans had positive returns and the average return on assets was 6.5%.
Overall, the average funding ratio for the 100 plans rose 90 basis points to 90.1% and the aggregate funding deficit fell $36.2 billion to $171.5 billion in 2018, achieving the highest funding ratio and lowest asset-liability deficit since 2013.
"We're in a period where we're going to see a broad spectrum of actions from plan sponsors," said Royce Kosoff, managing director, retirement, at Willis Towers Watson PLC in Philadelphia.
Mr. Kosoff said risk management strategies, particularly risk transfer transactions, were a continuing trend. "As the economics tend to work for both the plan sponsor and the insurance company, we expect pension risk transfer to be vibrant well into 2019," he said.
Mr. Kosoff pointed to Lockheed Martin's December buyout and buy-in as an innovative risk management transaction by a large plan sponsor.
To reduce risk in its U.S. plans, Lockheed Martin Corp., Bethesda, Md., in December purchased a $1.82 billion group annuity contract from Prudential Insurance Co. of America that transferred the obligations for about 32,000 U.S. retirees and beneficiaries, while also purchasing an $810 million group annuity buy-in contract from Athene Annuity and Life Co., which will reimburse Lockheed Martin for future benefit payments the plan will make to about 9,000 U.S. retirees and beneficiaries.
Lockheed Martin also contributed $5 billion to its qualified plans in 2018. Its funded status jumped 5.9 percentage points to 73.9% as assets fell to $32 billion from $33.1 billion and liabilities dropped to $43.3 billion from $48.7 billion.
Memphis, Tenn.-based FedEx Corp. made the largest risk transfer transaction in P&I's 2018 universe, purchasing a group annuity contract from Metropolitan Life Insurance Co. in May that transferred about $6 billion in obligations for about 41,000 U.S. retirees and beneficiaries.
With a $2.55 billion contribution by FedEx to its U.S. plans, the funded status increased 7.9 percentage points to 97.4%, assets decreased $2.87 billion to $22.06 billion, and liabilities dropped $5.22 billion to $22.65 billion as of May 31, 2018.
In December, Bristol-Myers Squibb Co., New York, announced plans to fully terminate its $3.6 billion principal U.S. plan through a combination of lump-sum payments to eligible participants and a group annuity agreement with Athene. The transaction is expected to close in the third quarter, according to the company's 10-K.
Bristol-Myers Squibb's defined benefit plans were 102.7% funded as of Dec. 31, with $6.13 billion in assets and $5.97 billion in liabilities.