Corporate plans calculate pension expense based on a number of factors including the current service cost, the amortization of past service costs, actuarial gains and losses, the expected return on assets and the plan's discount rate.
"Normally, when discount rates fall, you have liabilities that are going to increase. Then the pension expense should go up, right? Well, the liabilities did go up but the pension expense actually went down because of the fact that you have, at least in this population with the Milliman 100 group, you have plans that are quite mature," Mr. Wadia said.
Mature plans that are more heavily weighted toward retiree obligations than active or terminated vested employees tend to be less sensitive to the interest rate's impact on plan liabilities, he said.
"As a result, your pension expense can actually come down, which it did. The decrease in pension expense is part of a general trend that we've seen over the last eight years. We had a high point in pension expense for the fiscal year ending in 2012, when the pension expense reached its summit of $56.2 billion," Mr. Wadia said.
Plan contributions are another important consideration when looking at the pension expense and funding deficits of corporate plans.
"Whether or not you have a long-term deficit on your balance sheet or a surplus really depends on the comparison between historical contributions and historical pension expense," he said.
Combined contributions were lower over the past two years, totaling $68.2 billion, compared to combined contributions of about $120 billion in 2017 and 2018, Mr. Wadia said.
"Why did the contributions change so dramatically after 2018? We think the reason for that is, at the end of 2017, the (Tax Cuts and Jobs Act of 2017) passed under President Trump and the corporate tax rate was reduced. So, if you want to maximize your tax deduction, you would want to escalate your contributions prior to the effective date for lower corporate taxes. And so I think that had a big effect, policy wise, on many plan sponsors pumping in contributions during 2017 and '18, still classified as receivable contributions for the 2017 contribution year, before the tax policy changed," he said.
Mr. Wadia said it will be interesting to watch for policy changes under the current administration, including the impact of the $1.9 trillion American Rescue Plan Act of 2021, to see how future adjustments to the corporate tax rate might affect pension contributions and, ultimately, pension expense and funding levels.
"If the tax rate goes the other way, will we see an increase in contributions? I think we're in store for a lot of interesting times going forward as plan sponsors have more time to plan out their funding and investment strategies with the passage of pension relief," Mr. Wadia said.