By Erika Kummernuss, Brendan McFarland and Mark Warshawsky
The recent and deep recession and consequent pension funding deficits have prompted discussion about filling the shortfall by making pension plan contributions in the form of company securities1 instead of cash. According to a recent Towers Watson analysis, however, while a few companies contributed company securities to their defined benefit (DB) plans over the last year, the overall trend has been away from holding these securities as pension assets.
Towers Watson has been collecting data on pension plan assets from sponsors' financial disclosures for several years. In this article, we examine both the prevalence and the amount of pension assets invested in company securities between 2006 and 2009 among Fortune 1000 DB plan sponsors.
Prevalence and allocations
Figure 1 shows the percentage of Fortune 1000 DB plan sponsors holding company securities as a component of their pension assets. From 2006 to 2009, the prevalence of allocations to company securities declined by more than two percentage points — from 15.6% to 13.3%.
Figure 1. Prevalence of company securities among Fortune 1000 DB plan sponsors, 2006-2009
Source: Towers Watson.
Figure 2 depicts the average (simple and weighted by plan assets) allocation of company securities to pension plans. Results are shown separately for sponsors holding company securities and for all Fortune 1000 DB plan sponsors.
Figure 2. Simple and weighted average allocations to company securities for Fortune 1000 DB plan sponsors, 2006-2009
Source: Towers Watson.
From 2006 to 2009, on a simple average basis, companies holding company securities allocated between 4% and 5% of total plan assets to that asset class. The weighted average was roughly 2% in 2006 and 2009. The weighted average is lower because, among plans that hold company securities, larger plans allocate fewer assets to those investments than smaller plans.
In 2009, roughly 0.6% of DB plan assets in all Fortune 1000 companies were allocated to company securities on a simple average basis. The weighted average is somewhat higher at 0.9% for all Fortune 1000 companies because the prevalence of company securities is higher for larger plans than for smaller ones (as we see next).
The overall allocation to company securities declined from 2006 to 2008 for all measures, although weighted averages increased from 2008 to 2009.
Figure 3 depicts company securities prevalence for all DB plan sponsors in the Fortune 1000 broken out by asset size quartiles. According to this figure, larger plan sponsors (based on plan assets) have a greater propensity to hold employer securities, relative to smaller sponsors.
Figure 3. Prevalence of company securities among Fortune 1000 DB plan sponsors by quartiles of plan asset size, 2006-2009
Source: Towers Watson.
During the 2006-2009 period, larger plans shifted slightly away from company securities while smaller plans shifted in the opposite direction, but the movements were too slight to overturn our general observation of prevalence by size. Overall, among the sub-segment of sponsors holding company securities, smaller plan sponsors held higher allocations relative to larger sponsors. But among all companies, larger sponsors were more likely than smaller sponsors to hold company securities.2
Figure 4 shows the distribution of allocations to company securities for those that maintain this investment class.
Figure 4. Distributions of allocations to company securities among Fortune 1000 DB plan sponsors with company securities, 2006-2009
Source: Towers Watson.
Of companies holding company securities, the percentage allocating 2% or less of plan assets to company securities was roughly 30% in 2006, 39% in 2007 and 37% in both 2008 and 2009. This is the largest category.
In a small handful of companies, company securities made up more than 10% of plan assets. Under the Employee Retirement Income Security Act (ERISA), DB plans may not invest more than 10% of their assets in company securities.3 This restriction is intended to ensure that pension assets are diversified to help protect pension plans from becoming insolvent if a plan sponsor goes bankrupt. In the few cases where company securities make up more than 10% of plan assets, those companies did not contribute more employer securities than the ERISA 10% threshold allows. Rather, the most likely reason the share of employer securities exceeds 10% is the company's failure to rebalance out of company securities. In some cases, the value of company securities might have appreciated/depreciated differently than the value of other plan assets. In this analysis, the highest percentage of company securities as a share of plan assets is roughly 16%.
A closer look at 2010 Fortune 1000 DB plan sponsors with allocations to company securities in 2009
We next examine companies in this year's Fortune 1000 that currently maintain company securities in their pension plans and their allocations since 2006 (Figure 5). Focusing on a fixed set of companies eliminates the effects of turnover in the Fortune 1000 list on our results and more clearly shows plan sponsors' behavior over the last year, especially contributions of securities rather than cash.
Figure 5. Distributions of allocations to company securities among 2010 Fortune 1000 DB plan sponsors, 2006-2009
Source: Towers Watson.
In 2009, of companies in the 2010 Fortune 1000 with company securities, slightly more than 35% maintained 2% or less of assets in such securities; this is the largest category. In 2006, nearly 24% of the same companies held between 2.01% and 4% of their pension assets in company securities; this was then the largest category. Some of this shift resulted from employers' selling off company securities from 2006 to 2007. In other cases, employer securities appreciated more slowly than other pension assets over that year.
Five companies that currently hold company securities in their pensions added them after 2006. Two of them added company securities in 2008 and the other three added them in 2009. These companies decided to contribute employer securities to their pension plan instead of cash. Three other companies that previously maintained company stock also made their pension plan contributions in employer securities. For these latter three companies, employer securities as a share of pension assets rose from an average of 1.64% in 2008 to 9.89% at year-end 2009. Two of these companies contributed enough to reach the ERISA threshold.
Conclusion
The vast majority of DB plan sponsors do not hold company securities as pension assets. While a few plan sponsors recently made large contributions to their plans in the form of company securities, this analysis finds overall a slight trend away from company securities in the pension portfolio over the last few years.
Footnotes
1Company securities are mainly company common stock but also include company debt, preferred stock, etc.
2Defined contribution (DC) plans invest much more heavily in company securities compared with DB plans. Among Fortune 100 companies, 21 of 78 sponsors of DB plans (open, frozen or closed) — or 27% — held employer securities at year-end 2009, with such securities averaging 3.04% of DB plan assets at year-end 2009. In contrast, 77% of Fortune 100 DC plans held company securities in 2009, with the securities averaging 25.4% of plan assets at year-end 2009.
3ERISA section 1107: "A plan may not acquire any qualifying employer security or qualifying employer real property, if immediately after such acquisition the aggregate fair market value of employer securities and employer real property held by the plan exceeds 10 percent of the fair market value of the assets of the plan."
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