BlackRock’s latest report on key themes for U.S. corporate pension plans explores the various ways plan sponsors can put surpluses to work on behalf of beneficiaries and corporations.
It's a reflection of increasingly good times for a market segment long thought to be going the way of the dinosaur.
Some of those options could increase the exposure of corporate balance sheets to their defined benefit plans, such as re-opening the plan to new participants, as IBM did a year ago; and using the surplus to enhance benefits to beneficiaries or helping fund mergers with companies that have underfunded pension plans.
Other permitted uses would reduce the footprint of a plan on its corporate sponsor’s balance sheet, such as using the surplus to cover other benefits such as health care; offering lump sum payouts or pension risk transfers or bringing the surplus back to the organization, as Kodak moved to do last year.
Perhaps the likeliest of the seven possible uses BlackRock outlined would be for sponsors to “hibernate,” or continue managing their overfunded plans as is, with liability driven investment strategies to minimize risks.
If so, plan sponsors may still want to consider tweaking their LDI strategies to reflect the very tight spreads now for the corporate credit curve pension liabilities are valued against. Using less pricy treasuries in their stead could improve performance, especially if high-flying equity prices retreat, BlackRock’s report said.
Funded ratios have recovered from just over 80% around March 2020 to fully funded status on average by late 2023, with further gains last year that have left a quarter of big corporate plans 110% funded or better. That has changed the focus of conversations BlackRock has been having with clients, executives say.
“For the last 20 years…most of the investment conversations have been ‘how do I get to fully funded,’” said Martin Jaugietis, co-head of the Americas pensions group within multiasset strategies and solutions. Now with sponsors suddenly finding themselves in an over-funded position, the conversation has evolved to “now I have a surplus. What do I do with it,” Jaugietis said.
Strong equity markets, rising interest rates and a pickup in contributions by U.S. companies enjoying strong results have all contributed to that recent pickup in funded status.
And if previous moments of surplus — during the first internet bubble of the late 1990s or the years heading into the 2008 global financial crisis — ended in tears, this time around, Jaugietis said, the widespread use of liability driven investment strategies should make the fallout from the next potential bout of volatility much more manageable.
Meanwhile, “the tone of the conversation has shifted from … DB plans are slowly dying to ‘look, there are a range of paths that are possible to continue providing retirement benefits, and having a surplus in the DB plan is actually one of the potential ways that you should consider thinking about retirement provision,” Jaugietis said.
IBM’s much studied decision to re-open its DB plan, while halting contributions to its defined contribution plan, has yet to inspire other big corporate sponsors to follow suit, but it has helped revive the idea that “considering a retirement benefit holistically is an important question that a lot of sponsors should be asking themselves,” Jaugietis said.
Instead of looking at DB plans and DC plans in isolation, what is the best combination of the two, he asked.
“IBM looked at circumstances and made a choice that a DB benefit was the most efficient way to provide a retirement benefit in general to their population,” he said. More BlackRock corporate clients are considering using their surpluses to enhanced benefits to beneficiaries, he said.