Bob Collie, chief research strategist, Americas institutional, at Russell Investments, said by looking at the total contributions of the 16 corporate plans in Russell's “$20 Billion Club” — U.S. corporations with worldwide defined benefit liabilities of more than $20 billion — one can see a growth pattern that is continuing into 2012.
“Those 16 plans account for about 40% of the total assets and the total liabilities (of all corporate plans). The combined contribution in 2008 was $8.25 billion and in 2009 it went up to $21 billion. In 2010 and 2011 that's gone up to $25 (billion) to $30 billion,” said Mr. Collie.
The timing of these large contributions can also be attributed to record cash levels, according to Michael Schlachter, Denver-based managing director at Wilshire Associates Inc. “Cash is earning zero, their pension plans are earning 7% or 8% or whatever,” said Mr. Schlachter. “With that cash you can hire people, you can invest, you can build facilities or you can put it to work like that. Why not prefund the heck out of it right now?”
One reason companies can make these outsize contributions is that generally cash on corporate balance sheets is at an all-time high, Mr. Schlachter said. “Companies are earning virtually nothing” on their cash because it is conservatively invested in short-term instruments. Contributing to pension plans is “a better place to put cash to work than sitting there earning zero (return),” Mr. Schlachter said.
Ford, for example, had $22.9 billion in cash and marketable securities as of Dec. 31, up from $20.5 billion a year earlier, according to an SEC filing Jan. 27.
“A lot of companies are sitting on record amounts of cash and there isn't enough confidence to reinvest in the business,” said Kevin McLaughlin, New York-based senior investment consultant at Mercer LLC.
The rise in contributions is no surprise, said Alan Glickstein, Dallas-based senior retirement consultant at Towers Watson & Co. Pension funding rules brought about by the Pension Protection Act of 2006, combined with the financial crisis two years later that resulted in historically low interest rates, has built what Mr. Glickstein calls the “wall of contributions.”
“It's definitely starting to hit in 2012 and will probably last a couple years, at least,” said Mr. Glickstein. “As we adapt to this new pension funding law and the unfortunate timing of the economic downturn — and one of the reasons the interest rates are so low is the government holding (rates) down — some plan sponsors are having trouble with that.”
At the end of 2011, the unfunded liability of Ford's global pension plans was $15.4 billion, with its U.S. plans underfunded by $9.4 billion. It discount rate dropped to 4.64% from 5.24% the previous year.
Boeing's discount rate dropped to 4.4% from 5.3% a year earlier and the plans' funding ratio fell to 75% from 83% a year earlier.
“The deficits at the end of 2011 are as significant as the deficits at the end of 2009,” said Mr. McLaughlin. “It's a timing decision. Should I fund today or fund in the future? They'd rather pay more today ... than spreading these contributions over the next couple of years,” said Mr. McLaughlin.
Mr. Collie said that Russell is suggesting to clients that they might want to rethink the common practice of waiting until September to make their contributions.
By waiting until September, the last month that calendar-year plans are able to make contributions count toward the funded status of the current year's valuation, companies are able to control their cash for as long as possible. Such a concentration of large contributions might affect prices of long corporate bonds, which are in relatively short supply.
Editorial Page Editor Barry B. Burr contributed to this story.