Royce Kosoff, Philadelphia-based executive director of Willis Towers Watson PLC, said in a telephone interview that the spread between contribution scenarios for company pension plans is increasing.
“The ‘typical’ plan sponsor,” said Kosoff. “That notion doesn’t really exist. (Everything is) from fully funded plans with no real need for funding and contributions to plans that require substantial contributions despite the current relief.”
Scott Jarboe, a Washington-based partner in Mercer’s US wealth business, said in an interview that “the spread of results in 2020 was astounding”.
Mercer tracks the funding rates of S&P 1500 companies with defined benefit plans.
“The average plan rose from 87% in late 2019 to around 84% in late 2020, and somewhere in the middle it fell to 74% in March (2020),” he said.
However, in 2020 he said: “On average, the upper decile of these plans has improved funding status by 13 (percentage points) while the lower decile has decreased by 21 (percentage points).”
On the one hand, there are companies that are in a solid form of financing thanks to the measures taken in 2017 and 2018.
US corporations made largely large contributions over those two years to take advantage of tax breaks that were due to expire due to the passing of the Tax Cuts and Employment Act, signed by then-President Donald Trump in December 2017, the bill lowered the corporate tax rate from 35% to 21%.
Because tax law allows plan sponsors to deduct a portion of their pension contributions based on their tax rate, companies have poured billions into their pension plans to meet the September 15, 2018 tax deadline and deduct contributions at the higher 2017 tax rate.
For many companies, these measures met the minimum contribution requirements required for several years. The number of S&P 500 companies planning to contribute $ 100 million or more to their plans has declined for several years from a high of 66 companies in 2018.
According to Jarboe, S&P 1500 companies contributed a total of $ 75 billion to their DB plans in fiscal 2018. That number fell to $ 45 billion each in fiscal years 2019 and 2020.
On the other hand, there are companies in industries that have been hard hit by the COVID-19 pandemic. The Coronavirus Aid, Aid and Economic Security Act, signed by Mr Trump in March 2020, gave companies the option of a year-long vacation from paying pension contributions for 2020 through January 1, 2021 with accrued interest.
While not many companies benefited from the moratorium, those that did were generally in pandemic-ravaged industries.
One of them was American Airlines Inc., Fort Worth, Texas. The airline plans to contribute approximately $ 827 million to its defined benefit plans through 2021. Of this, $ 130 million is accounted for by 2020 minimum contributions that have been deferred under the provisions of the CARES Act.