$20 billion club report: Why you should care what the big plans are doing
Since 2011, we have issued annual reports on the largest listed corporate defined benefit (DB) sponsors in the U.S., codenamed the $20 billion club. This research is based on actual 10-k filings within days of them being issued and, to our knowledge, represents the first report in the industry on DB trends using actual data rather than projections. We just published our 2022 version of the report today.
These organizations represent nearly 40% of all pension liability for U.S.-listed companies. But how is this important for the majority of sponsors that:
- Sponsor plans are much smaller than these organizations,
- Do not have a dedicated investment staff, and/or,
- Have adopted an OCIO model to outsource the majority of investment-related decisions.
While the actions and experiences of these jumbo-sized plans may seem distant and unrelatable, I would argue that the information we share on the largest corporate DB sponsors has significant relevance to the sponsors of mid-sized DB plans.
Under the OCIO model, sponsors' focus should be high-level
Rather than looking at day-to-day investment manager changes or navigating plan audits, sponsors that have adopted OCIO can focus on decisions that have high impact on their plan's success with the help of their advisors. They might consider how much to contribute to their plans, whether to pursue a risk transfer or just want to understand the key drivers for funded status changes from year to year.
In our $20 billion club research, we cover all these aspects and do our best to articulate the major drivers and motivations. Major strategic decisions at these organizations are not made lightly, so understanding their key motivations can give perspective on the decisions you need to make at your organization.
You don't have to be the first mover, but it's nice to know who is
In 2012, GM, Ford, and Verizon led a watershed year for risk transfer, with large annuity purchases and/or lump sum cashouts to retirees. These moves were industry-defining and set a trend that continues to this day.
In 2017, UPS, Boeing, DuPont, and Verizon all made significant discretionary contributions exceeding $4 billion each, despite relatively small contribution requirements. Why? Because they anticipated tax reform would be coming and the corporate tax rate would decrease. This insight led to many sponsors boosting contributions above minimum requirements in 2018.
In 2019, we reported that sponsors were making dramatic changes to fixed income holdings. In fact, the average fixed income allocation had shifted from 44% to 49% in the previous year, motivated by a desire to de-risk, coupled with recent large discretionary contributions being deployed.
Each of these examples provided mid-sized DB sponsors with insight into the DB industry's direction and gave them an opportunity to consider each of these strategic moves without concern of being the first mover in the industry.
Is your plan experience consistent with the industry?
All DB plans are influenced by the same factors, regardless of their size. A rising tide lifts all boats, and we learned that the impact of rising rates and strong equity performance last year benefitted nearly every DB plan's funded position. When mid-sized DB sponsors review their plan experience for 2021, it can be helpful to see what factors were most influential for the largest plan sponsors that tend to get the most attention.
This type of information can arm plan committee members as they report to their colleagues and superiors. For example, the average funded status improvement in 2021 among the $20 billion club was around 6%. If your plan's experience were similar, you would gather more peace of mind. If it is worse, you can try to identify key factors about your situation compared to others. And if it is superior, that's good news for your organization.
Be in the know
With relation to this type of research, your OCIO has two primary roles:
- Take care of the administrative and day-to-day decisions to help sponsors focus on high-impact decisions, and
- Bring the best ideas on DB investment strategy through in-depth analysis and thought leadership, understanding your goals.
The best OCIO providers handle both of these roles with ease and keep the sponsors focused and educated on the strategic decisions that will have the most lasting impact on the success of your plan and its associated sponsoring organization.