Corporations face looming pension bills

The pending expiration of federal contribution relief and increasing longevity mean U.S. corporations face the need for large contributions to their pension plans in coming years.

The looming outlay would reverberate throughout the companies and could affect their operations, experts say.

Recent years of growing pension payouts and cutbacks on contributions have exposed corporate plans to potentially larger gaps in funding levels, said Kenneth S. Hackel, president, CT Capital LLC, Alpine, N.J.

And corporate pension contribution relief of MAP 21 — the Moving Ahead for Progress in the 21st Century Act of 2012 — which was extended in the Highway and Transportation Funding Act of 2014, will begin to fade “dramatically” in the next few years, contributing to the prospect of a rise in contributions, Mr. Hackel said.

For the 339 companies with defined benefit plans in the Standard & Poor's 500, annual aggregate pension contributions fell to $49.9 billion last year from $73.4 billion in 2010, while annual aggregate pension benefit payouts have risen steadily to $105 billion last year from $91 billion in 2010, CT data based on the latest 10-K filings show.

For individual companies, the gap can be large.

General Motors Co. has the biggest difference. In 2014, GM contributed $913 million to its pension plans, while paying out $7.4 billion.

GM's funded status worsened to 76.7% at yearend 2014 from 80% in 2013. While its total plan assets in 2014 were $80.4 billion, up from $79.1 billion in 2013, its plan liabilities rose more to $104.8 billion from $99 billion.

“We don't expect (to make) a significant mandatory contribution for the next five years,” said Tom E. Henderson, GM spokesman.

AT&T Inc. has the second-biggest gap, contributing $562 million, while paying out $6.5 billion in pension benefits.

AT&T's funded status worsened to 75.6% at year-end 2014 from 83.5% in 2013. Its total plan assets in 2014 were $45.1 billion, down from $47.2 billion, while its liabilities rose to $59.5 billion from $56.5 billion.

“In 2013, we voluntarily contributed a preferred equity interest in AT&T Mobility to our pension fund,” McCall Butler, AT&T spokeswoman, said in an e-mail. “This includes an annual cash dividend of $560 million, and a commitment to contribute an additional $700 million” in total through 2017.

“When you include the $9 billion value of the preferred equity interest in AT&T Mobility that we contributed to the pension fund in 2013, more than 90% of our pension is funded,” Ms. Butler said, although she added the Mobility stake, while included under ERISA rules, is not included under accounting rules in AT&T's pension assets in its 10-K.

“As legally required, we will continue to fund our plan consistent with these commitments and to maintain the ERISA required funding levels.

“We're comfortable with our current level of funding and the contributions we'll make through 2017,” Ms. Butler said.

Mr. Hackel said, “companies cannot continue to have a multiple of benefit payments over employer contributions (and) continue to lower their cash contributions,” worsening funding levels.

“They have been able to capitalize on the very big (equity) market we've had the last four years,” Mr. Hackel said. He added that the stock market rise could “turn around, which it mostly will now that the Fed (could start) to raise rates. These contributions have got to rise very substantially, double if not triple.”

As the pension plan funding relief phases out, the “impact to operations is going to be substantial,” Mr. Hackel said. “Larger pension contributions impact the financial structure” of corporations. “Stepped-up contributions to plans ... reduce a company's financial flexibility. It impacts their cash flows. It filters down to every phase of the companies' business.

“Absolutely it will hurt both the income statement and will change the (price/earnings) multiple and will also change the operating cash provided by the firm,” Mr. Hackel said.

“People think that, unfortunately, pensions (defined benefit plans) are a thing of the past,” Mr. Hackel said. “But they are not going away. They are not going away for many, many years. Twenty years from now they will have an impact on many of these companies. People are living longer.

“The health of the plan is the health of the plan, and nothing that Congress implements will change that,” Mr. Hackel said. “That doesn't change the necessity of funding” the plan.

Mr. Hackel didn't have an estimate of the impact on corporate income or stock valuation from an increase in contributions.

Alan Glickstein, Dallas-based senior retirement consultant, Towers Watson & Co., said, “There clearly is an upward trend to the required contributions because of the phasing out of the funding relief” as well as the implementation of new mortality tables that add to longevity risk and the risk of declining interest rates.

The Society of Actuaries last year released new mortality tables — lengthening the life expectancy for Americans — that are used by actuaries to project corporate pension obligations.

The new tables, which corporations embraced for accounting purposes, raised liabilities by “a pretty significant” 7% or 8%, Mr. Glickstein said.

But the corresponding impact on contributions and funding levels “would be much more than that,” he said.

The new mortality tables are “going to have a magnified effect on contributions,” Mr. Glickstein said.

Because the liabilities increase but not the assets, “your underfunded status goes up a lot more,” he said. “So the underfunding would almost double,” depending on the plan, he said. A plan's $100 million in liabilities could rise to $108 million, while its $90 million in assets would remain the same, meaning its underfunding would rise to $18 million from $10 million.

The effect on contributions might not come for two years, because for funding purposes corporate sponsors have to use mortality tables specified by the Internal Revenue Service, Mr. Glickstein said. ”We think they are going to publish new tables that are going to reflect in some way the tables the Society of Actuaries put out last year,” Mr. Glickstein said.

The IRS action probably will come in 2017, although it could be in 2016, he said.

The rate of benefits paid shouldn't affect funded status because the benefit payments correspond with a decrease in liabilities, Mr. Glickstein said.

Mr. Hackel said there is a strong relation with payments and benefits to the funded status, but other factors like terms of the plan and market changes could cause an imbalance that also reduces it.

“Even though benefit payments have gone up, probably the biggest factor that has led to liabilities going up is how the discount rate, used to measure those liabilities, keeps dropping,” Mr. Glickstein said.

“High-quality corporate bond yields (used for discounting corporate pension liabilities) have been falling for many, many years,” Mr. Glickstein said. “Some years they go up. But the general trend has been downward.”

The Merrill Lynch High-Quality 15+ Corporate Bond index interest rate, which reflects discount rates used by most corporate plan sponsors, was 4.5%, as of June 24, 50 basis points higher from the end of 2014.

“If we have a sudden increase in the stock market, that could offset the effects” of the new mortality tables and declining interest rates, Mr. Glickstein said. “If we have a very big drop in (investment) markets, that's obviously going to drive contributions up.”

“What the market does in 2015 is going to have an effect on contributions,” he said.

For the 15 years ended June 24, the average annual total return of the S&P 500 was 4.57%, Mr. Hackel said, pointing out that plan sponsors cannot count on the market to offset a growth in liabilities or low contributions. That return is below most corporate pension plans assumed rates of return.

“As of the last 10-K filing, the median allocation to equities was 47%,” Mr. Hackel said. “So if the market would turn down, it would really impact” funding levels. “The worst of all worlds would be if stocks were to fall and interest rates were to stay where they are.