A lot going on behind the numbers for the $20 billion club in 2015

The U.S.’s largest pension plan sponsors saw a fall in both assets and liabilities in 2015, with the net overall pension deficit falling by some $12bn.
This blog is a condensed version of our latest update on the club’s fortunes.

The combined pension deficit fell in 2015

The $20 billion club currently consists of the 20 U.S. publicly-listed corporations with the largest worldwide pension liabilities, each exceeding $22 billion as of financial year 2014.

The club offers a window into the trends affecting the wider corporate pension community. At the start of financial year 2015, the combined pension deficit of these corporations was $194bn, with liabilities totaling $968bn and assets $774bn. According to the latest annual reports, both assets and liabilities fell by more than 5% in 2015 and the deficit ended the year at $182bn.

The chart below shows how funded status has moved since 2004.

A lot going on behind the numbers for the $20 billion club in 2015

Source:  Russell Investments, Corporate 10-K filings.

In some previous years, there has been a single dominant cause behind the change in funded status: longevity improvements in 2014; rising interest rates in 2013; calamitous performance in 2008. But there was no such single story in 2015. Rather, several significant effects, none of which was overwhelming, combined to create a small net improvement in funded status.

Many contributing factors

Those effects included:

  • An anemic investment return of roughly 1% was well below the rate of return needed to keep up with the growth in liabilities resulting from the passage of time.
  • That was offset somewhat by the fact that interest rates rose: the median discount rate jumped from 4.0% to 4.4%.
  • Currency effects meant that the value in U.S. dollars of non-U.S. assets and liabilities fell fairly substantially in 2015. Many of these corporations have quite substantial overseas plans, and the net effect on funded status was a notable positive.
  • Contributions to pension plans took a big dive compared to recent years, most likely due to the funding relief provided by MAP-21 and HATFA. Indeed, the total contribution by plan sponsors in 2015 was less than the new benefits accrued in the year – so contributions did not even cover service cost. However, we found it notable that GM announced an intention to borrow $2 billion in 2016 in order to contribute to the plan. As Jim Gannon has written, we have now reached the point where it can be cheaper for many corporations to borrow money than to persist with a pension deficit.
  • 2015 saw an unusual volume of corporate activity, with a number of mergers, spin-outs, acquisitions and settlements. The combined net effect of this activity was a reduction of several billion dollars in combined plan assets and liabilities.
  • Finally, we also note a couple of changes in how these corporations are choosing to account for pension expense. The first is the move by two more corporations to mark-to-market. The second is a technical (but significant) change in the choice of yield curve for pension expense calculations.