Health-care law impact on DB, DC funds a year off

The added costs to companies of the new health-care law could hurt the funding of retirement plans, but any effect won't be apparent until at least next year.

“It's all interrelated,” said Michael A. Moran, vice president-portfolio strategist at Goldman Sachs & Co. New York.

Alan Glickstein, Dallas-based senior consultant at Towers Watson & Co., agreed. “A large increase in health-care cost could crowd out how much companies will spend on other compensation and benefits,” including pensions, Mr. Glickstein said.

“It's definitely a balancing act,” he added. “I think we will see a pretty active period in retirement program redesign.”

The current impact of the Patient Protection and Affordable Care Act is on non-cash corporate expense accounting, Mr. Glickstein said. As a result, the new law isn't creating an immediate cash impact on companies' pension funding intentions, he added.

As companies evaluate the law, Mr. Glickstein believes executives will consider pension plan redesign and how much pension risk they can assume.

Pension plan changes might start occurring in 2011 or 2012, he said, but “the thinking and planning are going on right now.”

Redesign studies are not just related to rising health-care costs, but also to the financial market meltdown, he said.

Goldman's Mr. Moran said added health-care costs resulting from the new law “is something they (corporations) will have to consider in the intersection of all their benefits packages.”

“We haven't quantified or attempted to quantify (yet) the total health-care cost impact to corporations,” he said. “I can't say if it is raising costs and would cause them to cut defined benefit contributions and defined contribution matching contributions.”

“If (companies) determine their costs of benefits will rise, that could lead them to freezing defined benefit plans,” as a way to reduce overall benefits costs, Mr. Moran said.

Said Christopher McNickle, managing director, Greenwich Associates, Greenwich, Conn.: “To the degree companies suddenly find themselves facing unanticipated expenses (from the health-care law) that will reduce their cash flow.”

“It would not surprise us if more plans close,” continuing a trend by companies. “To the degree they experience expense pressure and profit pressure, it could accelerate the process” of closing plans.

But Mr. McNickle said he couldn't connect future pension plan closings with a rise in health-care costs.

“Companies that are going to have a disproportionate expense impact are the ones that are going to suffer the most pressure and look for ways to respond,” Mr. McNickle said.

Regarding a potential for rising health-care costs to cause companies to seek an offset by cutting matching contributions to 401(k) plans, Mr. McNickle said, “I think it's less likely,” although “possibly for a company that finds itself in distress,” he said. “Our sense is that (the DC match) is a high priority in terms of benefit allocation and is less likely to be impacted than DB (contributions).” The match is more visible to employees and has more of an impact on morale, he added.

The major impact of the new law will be concentrated in about 11% of the Standard & Poor's 500 companies, according to a new report by Goldman's Mr. Moran and Abby Joseph Cohen, president of Goldman's Global Markets Institute.

These companies also tend to have among the largest corporate-sponsored defined benefit plans and defined contribution plans.

“Sizable retiree health-care liabilities tend to be concentrated in just a few companies and industries,” the report said.

“As of the end of 2009, 55 companies in the S&P 500 accounted for over 75% of the total amount of retiree health-care obligations for all companies in the index, and almost half of the total reported obligations were concentrated in just two sectors — telecommunication services and industrials.”

Mr. Moran and Ms. Cohen note in the report, “Many of these companies are highly unionized and their retiree health-care benefits may be protected as part of a collective bargaining agreement.”

Companies with the largest retiree health-care obligations, according to the Goldman Sachs report, are AT&T Inc., $36.2 billion; Verizon Communications Inc., $27.3 billion; General Electric Co., $12.7 billion; Boeing Co., $7.5 billion; Exxon Mobil Corp., $6.7 billion; Deere & Co., $6.3 billion; Ford Motor Co., $6 billion; International Business Machines Corp., $5.1 billion; and Caterpillar Inc., $4.5 billion.

AT&T, in a Securities and Exchange Commission filing March 26, said the company “intends to take a non-cash charge of approximately $1 billion in the first quarter of (this year) to reflect the impact of” the law's elimination of the tax deductibility of the federal subsidy for retiree prescription drug benefits. “As a result of this legislation, including the additional tax burden, AT&T will be evaluating prospective changes to the active and retiree health-care benefits offered by the company.”

Rolf Gatlin, AT&T spokesman, said on the potential impact of the costs of the health-care law on pension funding, “These are two completely unrelated things. That's all I can say.”

AT&T contributed only $2 million to its $46.8 billion pension fund in 2009, while it contributed $195 million to its $11.5 billion Voluntary Employees Beneficiary Association fund for retiree health-care benefits and $586 million to its defined contribution plans, according to the company's 2009 10-K report. It had $50.8 billion in pension liabilities and $36.2 billion in non-pension retiree benefits obligations, the report said. AT&T's defined contribution assets total $27.8 billion, according to a Pensions & Investments estimate.

Caterpillar Inc., in a March 24 SEC filing, said the new law will result in an approximately $100 million charge to the company's earnings, also in the first quarter. Jim Dugan, Caterpillar spokesman, couldn't be reached for comment.

Caterpillar expects this year to contribute $920 million to its U.S. pension plans and $120 million to its non-pension retiree benefits plan, according to its 2009 10-K report.

Last year, it contributed $886 million to its U.S. pension plans, including $650 million in Caterpillar stock. The company also contributed $94 million to its non-pension retiree benefits plan and $206 million to its U.S. defined contribution plans, including $68 million in Caterpillar stock.

Caterpillar's U.S. pension plans had a combined $9 billion in assets and $12 billion in liabilities, according to the report. Its non-pension retiree benefit plan had $1 billion in assets and $3.3 billion in obligations.