Prudent Pension Funding Report finds a majority could achieve full funding in just three years with no change to their current allocations.
Seattle, November 16, 2022 — Russell Investments, a global investment solutions partner, has released its 2022 Prudent Pension Funding Report, which reveals that even in a volatile market environment, most (86%) corporate pension plans can achieve full funding without a significant draw on corporate free cash flow, based on 2021 disclosures and market and interest rate movement so far in 2022.
“For companies looking to achieve full funding, the most straightforward solution could simply be a prudent contribution rate in concert with a prudent investment policy,” said Michael Hall, Managing Director, Americas Institutional at Russell Investments. “Even with this year’s volatile market, 50% of corporate pension plans could ‘prudently’ achieve full funding in just three years contributing 1% of cash flow from operations, and 50% could achieve full funding in just one year with a more aggressive 5% of cash flow from operations1.”
Using historic data from the firm’s Enterprise Risk Report, Hall and his colleagues studied the approximately 500 pension plans of companies in the U.S. large-cap Russell 1000® Index with pension disclosures. The team looked at the percentage of cashflow from operations needed for these pensions to become fully funded within 10 years. They point out the impact of poor performance of stock and bond investments in 2022, which diminished last year’s funded status gains early in the year, tampering the liability-reduction good news of 2021 and creating future uncertainty. Fast forward to fourth quarter 2022, and many plans are little changed from the beginning of the year’s funded status, mostly thanks to not being fully hedged against interest rate risk in a rising rate environment.
The Prudent Pension Funding Report looks at the past decade for perspective. In 2012, only 22% of plans would have been able to achieve full funding within 10 years at a contribution rate of 5% cashflow from operations. This year, that number is up to 86%.
However, the report’s analysis of the sensitivity of time-to-full-funding metric indicates that the ability for pension plans to achieve full funding shifts from healthy to challenging to very challenging within a dangerously tight range of prevailing funded status.
“Firms in the ‘challenging’ category are in that sensitive transition space where just a few good or bad decisions could move them safely into the ‘healthy’ category or jettison them into the ‘very challenging’ category,” said Hall, who has been providing investment consulting services to institutions since 1998.
Of the 500 plans that Russell Investments reviewed for this report, the average dollar amount of unfunded liabilities was about $530 million in 2020. The most recent 10k disclosures, issued in 2021, show that this figure has dropped to about $175 million, a difference of about $355 million in unfunded liabilities. As a result, the 500 companies in the Russell 1000® Index that have pension disclosures experienced a combined drop of $177.5 billion in unfunded liabilities.
More information on the 2022 Prudent Pension Funding Report is available here.
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 has $274.3 billion in assets under management (as of 9/30/2022) 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.
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1Cashflow from operations is defined as the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term capital investment.