Financial services companies have the best-funded DB plans, while IT and healthcare companies tend to have the lowest-funded plans, according to an analysis by BNY Mellon’s Investment Strategy and Solutions Group (ISSG).
Financial services firms, which had an average funded status of approximately 94%, as a group had the lowest requirement to fund their plans.
Financial services companies also tended to have higher-than-average allocations to equities, even though well-funded plans in other business sectors had 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,” says Andrew D. Wozniak, head of fiduciary solutions with ISSG. “They can do this as they have the best ability to take on risk, particularly as their DB pension plans are relatively small compared to the size of the companies in the sector.”
At the other end of the spectrum, IT companies tended to have the lowest-funded status, with the firms in that sector posting an average funded status of about 77%. The healthcare sector did slightly better with an average funded status of approximately 82%.
Different companies have varying abilities to take on risk, such as allocating a higher portion of their plan assets to more aggressive and volatile asset classes, ISSG notes. This ability to take on risk is based on three key factors:
- the size of the pension plan compared to 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.
Based on these factors, ISSG notes that utilities, materials and telecommunications companies have the least ability of the companies that were part of the analysis to take on 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,” he says. “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.”
The analysis was based on an analysis of 931 public companies.
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