Tom Meyers, executive director and head of Americas client solutions at Aviva Investors Americas LLC in Chicago, said the early months of 2020 have led to some discussions with clients about rebalancing.
"Typically, they have experienced a dislocation that has taken their asset allocation out of balance. For instance, they might have less equities than planned, just through the decrease in equity prices, and actually what happens is they rebalance back to target," Mr. Meyers said. "So clients at the height of the volatility were worried about their ability to access liquidity and effect the rebalancing that they typically would do. 'Do I rebalance? How much would it cost for me to rebalance?' Those things were on clients' minds."
Mr. Meyers said widening credit spreads in 2020 could also lead to further derisking opportunities, as plans look to match their liabilities against long-term corporate bonds.
"Another thing clients have been talking about to us, given the dislocation in credit spreads, is this an opportunity perhaps to do a greater amount of investing in LDI strategies. What you might expect in a reversal of this magnitude, of 10 full percentage points of funded status in the first quarter of this year, you would think, potentially, that pension plans would be investing less in LDI strategies because they've gone backward on the path to being fully funded. But we've observed more, not less, inquiries in LDI strategies and I think that's because people are viewing corporate bond yields as particularly attractive post the widening of spreads and decline in corporate bond prices that occurred at the first part of this COVID crisis," Mr. Meyers said.
Employer contributions fell almost 50% in 2019, to $26 billion from $51.2 billion, and the Coronavirus Aid, Relief and Economic Security Act, signed by President Donald Trump on March 27, could continue the trend of lower contributions into 2020. The CARES Act allows employers to defer minimum required 2020 contributions until Jan. 1, 2021.
Pittsburgh-based Alcoa Corp.'s minimum required contribution to its U.S. plans was $250 million in 2020, according to the company's 10-K filing on Feb. 21, but an 8-K filed on April 22 said Alcoa will defer its U.S. pension contribution in response to "economic uncertainty caused by the pandemic." Alcoa contributed $175 million in 2019 and ended the year with $5.02 billion assets, $6.53 billion in liabilities and a 76.8% funding ratio.
Despite having no minimum funding requirement in 2020, Delta Air Lines Inc., Atlanta, announced a voluntary $500 million contribution in its 10-K filing on Feb. 13. An April 22 10-Q filing indicated that decision was reversed due to "the impact of the COVID-19 pandemic on our liquidity."
Rising to a 74.7% funding ratio in 2019 from 42.8% at the end of 2014, Delta has contributed more than $1 billion in each of the past five years, including a $3.56 billion contribution in 2017. The company contributed $1.02 billion in 2019 and ended the year with $15.85 billion in assets and $21.2 billion in liabilities.