If you want a well-funded defined benefit plan, head for the financial services industry, energy or consumer staples, according to an analysis of 931 public companies’ DB plans by the BNY Mellon Investment Strategy and Solutions Group.
Conversely, health care companies and perhaps surprisingly, information technology companies tend to be those with the lowest-funded plans.
According to ISSG, financial services companies topped the list at an average funded status of 94 percent, while also having the lowest requirement to fund their plans.
They also tended to court higher risk with equity allocations that were higher than average, ISSG said in its analysis, although well-funded plans in other business sectors sought to cut risk with higher allocations to fixed-income and liability-driven investing strategies.
“While financial services companies may be in a better position than most sectors to adopt a de-risking strategy, many have elected to be aggressively invested,” said Andrew D. Wozniak, head of fiduciary solutions at ISSG. “They can do this as they have the best ability to take on risk, particularly as their defined benefit pension plans are relatively small compared to the size of the companies in the sector.”
On the flip side, IT companies were on the low-funding end, with plans averaging only a 77 percent level of funding. Health care edged them out with an average of 82 percent.
But before deciding that a particular industry is arbitrarily underfunding, consider this finding: ISSG also said that some industries were better or worse able to tolerate risk, with companies varying in their capability to take on more aggressive, more volatile asset allocations.
How risk-friendly they are, according to ISSG, depends on three factors: the size of the pension plan compared with the size of the company, cash that must be contributed to pension plans compared to free cash flow, and pension expense compared to operating income.
These three factors, said ISSG, mean that utilities, materials and telecommunications companies are the least able, among the companies that were analyzed, to tackle risk within their pension plans.
“It is important for these companies to undergo periodic stress testing to determine how they would weather a deflationary environment,” Wozniak said. “In a deflationary environment, interest rates and equity values tend to fall, causing plan funded status to diminish.
“Companies with a limited ability to take on risk will need to make sure they have enough cash on hand.”
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