According to an analysis conducted by Russell Investments, the “$20 billion club,”—a group that represents nearly 40% of the pension assets and liabilities of all U.S. listed corporations—started their 2012 reporting years with a combined net pension deficit of $182 billion and ended with a deficit of $220 billion.
The main reason for the increase in the size of the deficit was the fall in the discount rate used to value liabilities, which in turn was largely a result of a decline in yields on corporate bonds. Despite four consecutive years of good asset performance since 2008, the overall deficit in the $20 billion club rose by roughly $84 billion during that time—almost entirely due to the downward trend in interest rates.
Although the combined pension deficit is at an all-time high, there are some positives, according to Bob Collie, chief research strategist, Americas Institutional at Russell Investments. “Interest rates can only go so low,” he said. “In the past six months, we’ve seen discount rates edge up by about half a percentage point, and a good part of that has come since the turn of the year. The downward trend over the past few years has hit pension plans hard, and if that trend has finally ended, that would be very welcome news. A lot of people are hoping that this does not prove to be a false dawn.”
In a related blog posting “Piling on the pain at the $20 billion club”, Collie also notes the silver lining that it is cheaper for corporations to raise money by issuing debt when interest rates are low. Several have chosen to do recently, in part to help fund their pension plans.
Corporations are responding to the challenges in their pension plans by reconsidering their benefit strategies, funding strategies and investment strategies. “These are the corporations with the largest dollars at stake, but the same challenges are found at just about every corporation with a pension plan,” added Collie. “Ultimately, what is happening among these plans is a restatement of objectives and a move toward multiasset investment strategies that better reflect the desired outcomes. All of the other trends that have been noted among pension plans—from de-risking to liability-driven investing [LDI] to volatility management—find their origins in this recognition of just how significant the plan’s impact can be on the sponsoring corporation.”Russell’s research report can be downloaded from here.