Pension-Heavy Firms’ Stock Performance Crushed by First-Half 2020 Market Volatility

The companies in the S&P 500 with the greatest pension exposure underperformed significantly in the first half of 2020, demonstrating the inherent risk and volatility associated with large pension plans. Adjusted returns for the S&P 500 in 1H 2020 were -4%, while returns for pension-heavy companies were -21%. Unsurprisingly, companies without pensions ultimately performed the best out of the subgroups, with returns of -2%.

These stock performance results reflect the broader, longer-term trend seen with pension-heavy companies, which tend to underperform relative to the overall market; the likely prospect of needing company cash flows for plan contributions, instead of investing in more value-additive ventures, continue to burden companies with pensions. The evident underperformance of pension-heavy companies, coupled with the outperformance of companies with no pensions liability, may also denote shareholder qualms about pension obligations, as exposure to shifting interest rates and mortality assumptions, Pension Benefit Guaranty Corporation (PBGC) premiums, and duration mismatches between plan assets and pension liabilities loom over companies with pensions.

Chart of year to date average change in stock price, dividend adjusted. Beginning at zero percent on December 1, 2019, and ending on June 1, 2020. Companies with no pension performed best, falling by 20 percent by March 1, 2020, but rising to negative 1.9 percent by June 1, 2020. The S and P 500 also fell by about 20 percent by March 1, 2020, but rose to negative 4 percent by June 1, 2020. Pension light companies fell by about 25 percent by March 1, 2020, but rose to negative 9.7 percent by June 1, 2020. And pension heavy companies fell by about 30 percent by March 1, 2020, but rose only to 20.9 percent by June 1, 2020.

The Ultimate Goal: No More Pension Risk

We define pension-heavy as a company with a pension benefit obligation (PBO) relative to the firm’s market capitalization of 15% or greater, which delineates the top quartile of companies with pensions in the S&P 500. Conversely, we define pension-light as a company with a PBO relative to market capitalization between 0% and 2.5%, which delineates the bottom quartile for companies with pensions in the S&P 500.

Based on our analysis, pension-light companies outperformed pension-heavy companies, but still underperformed relative to companies with no pensions. While we typically view the size of the pension plan relative to the size of the company as a proxy for risk, these results suggest that any pension risk may be considered bad risk by shareholders, particularly in volatile markets. In fact, companies with little or seemingly insignificant pension risk may still benefit from eliminating risk via a buy-out with an insurer. Companies without pension plans are better able to focus on core businesses and remain undisturbed by the fluctuations of pension volatility; ultimately, such companies have a greater opportunity to create value for shareholders. While multiple factors affect stock prices, the unique volatility in 2020 continues to demonstrate the long-term trend that companies with significant pension risk exposure underperform relative to the broader market.


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