The financial services industry leads the way for highest funded defined benefit (DB) plans, along with energy and consumer staples firms, according to BNY Mellon.
BNY Mellon’s Investment Strategy and Solutions Group (ISSG) conducted an analysis of the DB plans of 931 public companies and found that financial services firms have an average funded status of approximately 94%, while IT and health care companies typically have the lowest funded plans.
The study found that financial services companies tend to have higher-than-average allocations to equities, but this is not necessarily an indicator of success, as well-funded plans in other business sectors had higher allocations to fixed income and liability-driven investing strategies, according to ISSG.
“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 Wozniak, head of fiduciary solutions, 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.”
“In analyzing risk tolerance, BNY Mellon recommends that plan managers take an enterprise risk management (ERM) approach,” adds Wozniak. “This means evaluating opportunities and risk from the lens of the entire corporation, rather than viewing the pension plan in isolation. By helping plans view their risks and opportunities from an ERM approach, we can help them avoid threats that plans taking only a narrow approach could miss.”
ISSG notes that the ability to take on risk depends on three main factors: the size of the plan compared to the size of the company, cash that must be contributed to plans compared to free cash flow, and plan expenses compared to operating income.