$20 Billion Club Strategy Series – Funding Policy

Executive summary:

  • In 2022, the funded status of $20 billion club members reached its highest level since 2007 due to steep rises in discount rates.
  • Many plan sponsors' funding policies are linked to minimum required contributions under the Pension Protection Act. If the expected contributions in 2023 hold, they will be the lowest we've seen while monitoring the $20 billion club.
  • For the first time since MAP-21 legislation was passed, the market interest rates are near or above the interest rates used to determine regulatory contributions—as a result of 2022's large increase in rates.

Today we'll conclude our three-part series on the $20 billion club strategy. For those who missed the first two articles in the series, the $20 billion club is a group of pension plans each with more than $20 billion of global pension liability. We have been reporting on this cohort for the last 13 years following how and why their funded status has changed over time and reporting on how these sponsors' strategies for managing risk have evolved over time.

We highly encourage you to read the first two articles in the series, if you've missed them, for insight into what these mega-plans sponsors are working on with their investment and benefits policies. However, there are some key points worth reiterating for the sake of this article. This series addresses the major levers that plan sponsors can pull to impact the trajectory of their large defined benefit (DB) plans. These three broad levers are often closely intertwined and pulling one can lead to adjusting another. The three key levers are:

  1. Investment policy – This lays out how those contributions go to work for the sponsor
  2. Benefits policy – This directly impacts plan participants' benefit accruals
  3. Funding policy – This determines the contributions made by the sponsor to pay for those benefits

In the first article in the series, we looked at the investment policy of these mega-plans, and we reviewed the benefits policy in the second. For the final piece, we'll be reviewing the funding policy of the $20 billion club and what we might gather from the recent history of these mega-plans. Many plan sponsors have official policies to "contribute at least the amount required under the law" but under the hood, there is often much more going on than meets the eye with respect to this policy.

Similar to the other policies we've discussed over the course of this series, the funded policy is intertwined with the other policies but, perhaps even more so than the others, the funding policy is a function of the funded status of the plan. Of course, there are regulatory contribution requirements under the Pension Protection Act (PPA) based primarily on funded status, but it goes further than that. Depending on the goals of the plan sponsor, funding can continue up to and beyond the plan being fully funded. Before we dive into some more contribution specifics, let's take a step back and review the funding status of the plans in the $20 billion club.