New analysis of the country's largest private-sector pensions shows sponsors' investment strategies are diverging like never before. Russell Investments has published a new review of how pension assets are managed among the 20 sponsors in the “$20 billion” club, a group coined by Russell in 2011 in an effort to track trends among the largest pensions.
Bob Collie, chief research strategist at Russell, writes that while uniformity in investment strategy persists among individual retirement savers, non-profits and public pensions, the largest defined-benefit sponsors are showing signs of more individualized approaches.
Much of the new trend is explained by the divergence in return-seeking and liability-driven strategies, says Collie. He compares Ford Motor Co.'s U.S. pension plans, which have 77% of their assets invested in fixed income and just 7% invested in equity, with Johnson & Johnson's worldwide plans, which are invested 79% in equities and just 21% in fixed income.
Equity strategies are also less uniform than previously observed. UPS's U.S. plan has over half of its equity allocation invested in international holdings, while Honeywell's U.S. plan holds 76% of its equity portfolio in domestic companies.
Further difference is realized with respect to real assets and alternative investments. Dow Chemical, Northrop Grumman and Verizon each have 10% of their portfolios invested in real estate assets, while Exxon Mobile does not have a committed real estate allocation. And Verizon has 19% of its pension portfolio invested in private equity, compared to Federal Express, which only holds 1% of assets in private equity.
Five of the top 20 pensions show no interest in hedge funds, while 12% of UPS's assets are invested in hedge funds.
“Investment decisions are clearly being driven by factors other than a desire to track the broader peer group behavior, and that has to be a good thing,” writes Collie.
The 20 largest pension sponsors collectively hold $914 billion in future obligations, according to recent data from Russell.
By the end of 2015, the club's total funding deficit was $182 billion, a slight improvement over the $194 billion charted at the beginning of 2015. An increase in the average discount rate, which is used to price future liabilities, from 4% to 4.4%, explained much of the improvement.
Together, club members held $732 billion in assets at the end of last year. Investment returns for the year were a paltry $8.3 billion, or 1%, well below sponsors' interest rate liability on future obligations.
Last year, the $20 billion club paid $49 billion in pension assets to beneficiaries.
At the end of 2010, only one member had as much as 45% of assets invested in fixed income. By the end of 2015, six had as much allocated to fixed income, with three sponsors—Exxon, Ford and GM—having at least 55% of their portfolios in fixed income, according to Russell's review of the companies' 10K filings with the Securities and Exchange Commission.
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