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November 2017 | Pension Solutions

Utility Pensions: What's Past is Prologue

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As US pension plans move towards de-risking through liability driven investing, utility pension plans continue to fall behind. This is due, in part, to regulators that allow recovery of losses through a rate setting mechanism which, in turn, drives unnecessary allocation to equities and passes on investment losses to ratepayers. In this report, we provide key findings and recommendations based on a comprehensive analysis we performed on the financial statements of 47 publicly traded utilities from fiscal year-end 2007 to 2016.1   By examining this past, Utilities can write a new prologue of prudent risk reduction for their pensions.

  • Defined benefit (“DB”) pension exposure for the utilities industry is material. The 47 utilities we analyzed have a combined Pension Benefit Obligation2  of approximately $173 billion, equal to 25% of the industry’s aggregate market capitalization. Utility DB pension liabilities are only 83% funded, equal to a dollar deficit of $29 billion, despite contributions in excess of $41 billion since 2008 (Exhibit 1).3
  • In an effort to close the pension funding deficit, utility DB plans continue to maintain significant risk exposure to equities and unhedged interest rate risk. Based on our analysis, utilities' average equity allocation is 46%, much larger than the 35% average equity allocation for companies in the S&P 500 with DB pension plans. Utilities also maintain a smaller allocation to fixed income (40% versus 44% for the S&P 500 company plans).
  • These risks are no longer desirable. Changing pension legislation has increased the penalties associated with both plan surpluses and deficits. Many DB plans have also reduced their expected return on assets. These factors have contributed to a broad de-risking trend among US DB plans. Utilities have lagged this trend, largely due to regulatory concerns about the potential impact on ratepayers.
  • With the support of state regulators, we recommend that utility DB plans implement a fund and de-risk program to pass on lower and more stable costs to ratepayers, secure DB plans, and improve the industry’s financial health.

EXHIBIT 1: DEFINED BENEFIT PENSION EXPOSURE IS A MATERIAL RISK FOR UTILITIES

Utility DB assets and liabilities (left) and funded status levels (right)

Utility-Pension-Study_Exhibit1

Source: GSAM, Bloomberg and 10-K (2007-2016).

Learn more about Goldman Sachs Asset Management's Pension Solutions.


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