Discount rates and investment returns propel funded status to highest point since 2007
SEATTLE, March 7, 2022 — The average global funded status for the largest pension plans jumped to 93.8% in 2021, reaching the highest level in 15 years, according to Russell Investments’ annual analysis of 19 publicly listed U.S. corporations with more than $20 billion in pension liabilities. Dubbed the $20 billion club, these large plans, which represent nearly 40% of all pension and liability assets of U.S. listed corporations, ultimately benefitted in 2021 from the rare combination of favorable discount rates and investment gains. The analysis also reveals that funding deficits in dollar terms decreased dramatically from $150.3 billion at year’s end 2020 to $65 billion at year’s end 2021.
“A rising tide lifts all boats, and the $20 billion club plan sponsors enjoyed a tailwind of both actuarial gains from rising discount rates and investment gains,” said Justin Owens, director, Investment Strategy & Solutions at Russell Investments. “The total funding deficit is now less than half what it was one year ago.”
Owens added that the $20 billion club has only seen an increase in both calendar-year investment returns and actuarial gains (usually rising discount rates) twice since the Global Financial Crisis in 2007—in 2013 and 2021.
Russell Investments’ analysis also revealed that the funded status improvement had little to do with employer contributions, as 2021 contributions were at their lowest level in the 18 years of tracked data, and by a comfortable margin. “Our analysis of disclosed financial expectations indicates company contributions will remain low in 2022,” Owens said. “The impact of continued funding relief, improved funded status, and the prospect of higher corporate tax rates on the horizon are all playing into companies’ contribution decisions.”
Specifically, Owens cites the following four reasons for low contributions:
- Funding relief—further expanded by the American Rescue Plan Act of 2021 and extended with Infrastructure Investment and Jobs Act—have kept pension contribution requirements very low in the U.S.
- Continued uncertainty around the economic impact of COVID-19 have led companies to retain cash where possible.
- Companies anticipate a higher tax deduction for contributions if corporate tax rates increase as currently proposed.
- Plans are already better funded than in prior year.
Additional observations from this year’s $20 billion club analysis include:
- Liabilities have fallen in the last year with lower discount rates, dipping below the $1 trillion threshold to $967 billion.
- Assets remained about the same as 2020 at about $902 billion, with strong equity returns offset by benefit payments and annuity purchases.
- Contributions: fell dramatically in 2021 as sponsors saw little need to fund the plans further.
- Funded ratio: The average increase in funded ratio among these sponsors was 7.2%, and all 19 sponsors saw an improvement of at least four percentage points. The three companies with the largest funded ratio gains were Johnson & Johnson (up 12.6%), United Parcel Service (up 10.9%), and Dow Chemical (up 10.6%), all of which have adopted relatively aggressive asset allocations with 65% or more in equities and alternative assets, which performed well in 2021. But even for companies with less aggressive asset allocations, such as Ford with over 80% in fixed income, the funded ratio improvement was still solid (7.1%).
For more information, read the $20 billion club report.
About Russell Investments
Russell Investments is a leading global investment solutions firm providing a wide range of investment capabilities to institutional investors, financial intermediaries, and individual investors around the world. Building on an 86-year legacy of continuous innovation to deliver exceptional value to clients, Russell Investments works every day to improve the financial security of its clients. The firm is the world’s seventh-largest investment adviser, with $1.2 trillion in assets under advisement (as of 12/31/2021) and $340.8 billion in assets under management (as of 12/31/2021) for clients in 32 countries. Headquartered in Seattle, Washington, Russell Investments has offices in 19 cities around the world, including in New York, London, Toronto, Tokyo, and Shanghai.
Steve Claiborne, 206-505-1858, email@example.com