Funding Improvements and Pension Offloading

Defined benefit (DB) plans have enjoyed a funded status boost of late, but what does this mean for their future?

According to a UBS “Portfolio Advisor” report, in 2013, U.S. stocks continued to surge and bond yields have remained near yearly highs—improving both sides of pension balance sheets. A subset of large corporate pension funds is approaching fully funded status.

The report says this has been achieved in no small part thanks to sponsors’ record contributions in the past few years. UBS estimates companies have been writing checks to pensions to the tune of $60 billion to $80 billion annually in the past few years.

The company notes it is no small secret that many DB plan sponsors are looking to transfer their responsibilities for pension liabilities. While that goal seemed remote when funded ratios were in the 70% to 80% range, sponsors of fully funded plans are in a position to move forward on immunizing and offloading pension liabilities.

“That would help lower corporate earnings volatility going forward, but it would also potentially create a great generational divide. While current retirees and those approaching retirement would enjoy a decent level of income promised by fully funded pension plans, employees in the early stages of their career and future generations would not see that kind of benefit at retirement,” the report says.

The UBS data also shows a trend of moderate rebalancing among pension plans. The firm estimates defined benefit funds will sell $15 billion to $19 billion of equities and buy $6 billion to $8 billion of fixed income—including both public- and private-sector funds. Within key equity asset classes, UBS sees sizable $17 billion to $21 billion sales of U.S. large cap. Flows in other equity sectors should be very small.

For the last three years, U.S. pensions have conducted moderate stock sales and small fixed income purchases during the fourth quarter.