Asset Allocation Made the Difference for Corporate Pension Funding in 2021

Plans with higher equity and lower fixed income allotments outperformed.

Corporate pension plans had a great year. The average funded ratio was 96.3% in 2021, up from 88.1% the previous year and the highest number on record since 2007, according to the most recent Milliman report. (This figure has been updated with new data and is slightly lower than the firm’s January 2022 estimate of a 99.6% average funded ratio.)

But while the data has been quite impressive across the board, certain strategies differentiated more successful corporate pensions from others. The Milliman report considers funding of the 100 largest U.S. corporate pension funds.

Funded ratios still varied considerably, with Proctor & Gamble having the lowest ratio, at 70.6%, and NextEra Energy having the highest, at 165.1%. The plans with the highest funded ratio increases were Deere & Company, Eversource Energy, and Delta Airlines, and saw their ratios improve by 21.3 percentage points, 19.7 percentage points, and 19.4 percentage points respectively.

In general, the plans that performed the best allocated more to equities and less to fixed income, according to the report.

“The 19 plans with equity allocations of at least 50% earned an average return of 11.9% while the 28 plans with equity allocations below 25% earned an average return of 5.2%,” states the report.

Despite these statistics, corporate pension funds have on average decreased their allocations to equities and increased their allocations to fixed income. Equities now account for 29.0% of the average plan as opposed to 43.9% in 2008. Fixed-income allocations have increased to 51.2% from 41.7% in 2008.

The reason for this is the ongoing implementation of liability-driven investment strategies. The trend toward LDI continued this past year, albeit at a slower pace: Fixed income as a portion of the portfolio increased by approximately 0.6%.

While LDI often does not achieve returns as high as those of equity-driven strategies, the plans that engaged in LDI also reported lower funded ratio volatility.

Discount rates also increased by 32 basis points in 2021, which helped contribute to a decrease in pension obligations of 7.1%. Increased pension risk transfers also contributed to this trend, leading to a net liability decrease of $141.6 billion. The dollar volume of PRTs in FY2021 was approximately $12.1 billion larger than the dollar volume in FY2020.

Corporate plans also saw an average investment return of 8.4%, leading to an increase of $26.6 billion in the value of their assets, according to the report.