RICHMOND, Va. - The same stock market that has rewarded Ethyl Corp.'s pension fund has punished the company's shares.
But, since Ethyl's investors can't buy shares in its hugely profitable pension fund, the chemicals manufacturer is offering what it considers to be the next best thing - tapping a portion of its surplus pension assets to clean up the company's balance sheet, hoping the maneuver will help its stock bounce back.
Ethyl will shut down its pension fund at the end of the year and use $50 million of the surplus to retire corporate debt. It will establish a new plan on Jan. 1 with $60 million in surplus from the previous plan.
Ethyl's current pension fund has racked up huge surpluses from investing all its assets, barring a small cash position, in equities. At the same time, the company has seen its own stock, reflecting lower profits, nose dive to an all-time low of $1.44 per share on Oct. 2, down from $4.75 a year earlier. The stock was removed from the S&P Midcap 400 stock index at the end of September.
By the end of 1999, the pension fund had a surplus of $235.3 million, almost half of its $546.4 million in total assets. The pension fund had $311.1 million in liabilities, making it 175% funded.
Cost of change
Ethyl's plans won't come without a cost, particularly with taxes.
Setting up a "replacement" plan that uses at least 25% of the surplus lets Ethyl cut its tax penalty for dipping into the pension fund to 20%; companies that revert pension assets without setting up a new plan must pay a 50% penalty. And because companies don't pay taxes on money they contribute to their pension funds, they must also pay income taxes on the assets they siphon from the plan.
Because the firm could pay as much as 40% in federal and state income taxes, and a 20% reversion tax on top of that, Ethyl could see as much as $100 million of its surplus vaporize. Still, Mary Habel, director of employee benefits, said the company thinks it's worth the cost. "The money as it is now in the pension surplus is of no use to the company or to shareholders," she said. The surplus pension assets the company hopes to use to reduce its debt is about the same amount of cash flow the company generates in a year, said David A. Fiorenza, who is in charge of investor relations at Ethyl.
Federal pension law also requires companies that shut down their plans to vest all employees and pay them the pensions owed to date. Ethyl plans to buy annuities for all its retired workers by the third quarter of 2001 and hopes to get the government clearances to revert its surplus pension assets at about the same time, Ms. Habel said.
Younger employees will be able to choose between taking a lump-sum payout or collecting monthly pensions when they retire.
The company recently started holding meetings to educate workers about how to invest the lump sum, if they take that option, and it intends to hold meetings next spring to help workers figure out how to invest their retirement money, Ms. Habel said.
The company's new pension plan, which kicks in on Jan. 1, will be identical to the existing plan, except that it will take into account the benefits workers already have received, Ms. Habel said.
The new plan will be substantially smaller, but since Ethyl will pay off all the benefits it owes workers so far, it will have a much smaller liability - $20 million to $25 million - to pay for future benefits it owes, Ms. Habel said.
"The new plan will also be overfunded," she said.
The market's recent convulsions are unlikely to affect the company's plans because its surplus won't be calculated until the third quarter of next year, when Ethyl will pay off the benefits it owes workers so far. Ms. Habel said the firm is hopeful the market will go back up. "If it doesn't, the surplus will be smaller, but we don't anticipate that market conditions are going to seriously impact" our plans, she said.
But, since the company's pension fund also is a huge contributor to its bottom line (accounting rules permit companies to take their pension surpluses into account when calculating earnings), the question remains whether Ethyl is slaughtering the goose that lays the proverbial golden egg. Ethyl reported $14.6 million in pension income and $59.3 million in income from operations last year. Its pension income this year is much higher because it bought annuities for retirees and shrank its pension liabilities proportionally. Accounting rules let companies take more of their pension income into account when they take pension obligations off their books. As a result, Ethyl's pension fund contributed $57 million to the bottom line for the first half of 2000 - in contrast, the company earned $16 million before taxes from operations during the period.
The company also is examining its investment strategy and money manager lineup with the help of investment consultant Evaluation Associates, Norwalk, Conn.