Dive Brief:

• Regulated utilities have highly predictable cash flows and access to capital, but as a whole, they are not taking advantage of these unique features when it comes to funding pension plans, according to a new analysis from SEI Institutional.
• Plan funding levels are low, relative to other sectors: the median funding level for utilities’ pension plans is 78%, SEI said. And obligations are significantly larger than current assets: the median pension liability facing utility companies was $698 million, against assets of $529 million.
• According to Tom Harvey, director on the Defined Benefit Advisory Team for SEI’s institutional group, utilities should be "on upper end of aggressiveness," making higher allocations to equities, due to their stability and long-term planning horizons.    

Dive Insight:

Pensions are a bit dated and distant from daily operations, but they represent long-term liabilities that utilities must plan for over a time horizon that can span decades. Harvey says many regulated companies would be well-served by utilizing their unique advantages, but the study of pension funding levels reveals they are not.

"Utilities invest in their pensions pretty much like every other business does — all over the map and with a range of allocations," Harvey told Utility Dive. As utilities have these shared characteristics, "they should have similar strategies, but they don't." 

Harvey typically deals with the utility CFO and treasurer and those in charge of human resources, when helping manage pension plans. He has three suggestions utilities should consider: First, "be on the upper end of aggressiveness," he said, which can include a higher allocation to equities.

But risk is more appropriate in pensions with lower funding levels, he said. SEI's study found that several utilities’ pensions are taking undue risk at higher funding levels. "This raises a concern that assets are not being properly allocated to match risk profiles," the firm said.

He also suggests a lower allocation to liability driven investments, advocating a strategy that "tries to match benefit payments over time in a corporate bond portfolio." And finally, utilities should make only the minimum contributions to pensions that are required.

Required payments are recalculated each year, he said. "You could make discretionary payments today that you might never have to make," said Harvey. "This is very long lived liability," he added. "Utilities are in a unique position to deal with this."

As a group, utility pension funding levels "appear to be somewhat depressed," according to SEI. The median funding level of pension plans in the peer group was 78%, which the firm says is "relatively low compared to other pension plan sponsors outside of this sector."

The funded level of the 100 largest private sector pension plans in the United States was 94.5% through September 2018, SEI said.

While pension plans have become more rare as companies shift to 401Ks for retirement planning, Harvey said they remain relatively popular in the utility sector. "Across any industry sector, there are probably more open [utility pension] plans than any other sector we deal with," Harvey said.