Did 2018 Funded Gains Even Happen?

Pension funded status began and ended 2018 at roughly the same levels. That suggests stability, but analysts show that it was anything but in 2018.

A recent J.P. Morgan Asset Management report, “Corporate Pension Peer Analysis,” shows that among the largest corporate pensions, funded status on Dec. 31, 2018 was 87.2%, 1.5 percentage points higher than the 85.7% on Jan. 1. But that gives no indication what took place in between.

The average funded level among those plans in general steadily rose through the year, hitting 94.4% by the end of the summer. But in the fourth quarter, the bottom fell out. By the end of the year, the average funded level was almost where it was at the start of the year. “The headline figure masks an amplification of intrayear funded status volatility, with the average plan falling an estimated 7.2% in the fourth quarter alone,” says the report.

Wilshire Consulting reported similar findings in its analysis of the funded status of the Standard & Poors 500 companies. Among those plans, funded status was 91.5% in September; however, when the market dropped in the fourth quarter, their average funded status stood at 84.5%, seven percentage points lower.

So what happened? J.P. Morgan says that asset allocation and manager performance “certainly played a role,” but it says that contributions were the “largest driver” of the roller coaster. “Given the backdrop of heightened volatility, the amount, timing and allocation of capital injections all mattered,” the report says.
 
Willis Towers Watson PLC's Philadelphia office Managing Director Royce Kosoff, said in a Pensions & Investment interview that negative investment returns in 2018 offset the median discount rate increase which reduced pension liabilities, “which left average pension funded ratios relatively unchanged from the beginning of 2018 to the end of 2018."

And the J.P. Morgan report suggests that it’s no accident that funding levels were as high as they were when they were. “Peak funded status for 2018 roughly coincided with the September contribution deadline for locking in the 35%, rather than the current 21%, corporate tax rate deduction,” says J.P. Morgan. Calendar year plans could take advantage of the deduction that was in force before the reduction under the Tax Cuts and Jobs Act that kicked in on Sept. 15, 2018.