With Rex W. Tillerson, chairman and CEO of Exxon Mobil Corp., leaving to become secretary of state in the new Trump administration, pending Senate confirmation, the timing is opportune for his replacement to address a longstanding pension funded status issue.
Darren W. Woods, Exxon Mobil president, who was named as chairman and CEO, effective Jan. 1, should bring the company's defined benefit pension plans up to full funded status.
The good news is the company embraces defined benefit plans and has pension plans that are active and open. The bad news is the plan appears chronically underfunded, as the funded level is 56% with $10.9 billion in assets and $19.5 billion in liabilities. An increase in interest rates will help improve that funding level but is unlikely to bring it up to a comfortable level any time soon.
The underfunding means Exxon Mobil risks having to pay increasingly higher premiums to the Pension Benefit Guaranty Corp. under the agency's rising rate schedule.
The underfunding risks shortchanging participants from benefit increases. The Pension Protection Act of 2006 generally prohibits benefit increases by plans less than 80% funded. In addition, the underfunding could prohibit participants from taking lump-sum distributions when they retire, if the plan allows such a choice. The PPA prohibits plans less than 60% funded from making lump-sum distributions, while it limits such distributions for plans whose funded level is between 60% and less than 80%.
In addition, the underfunding adds to the corporate balance sheet liabilities, detracting from shareholder equity.
Fully funding the plan would enable the company to pursue a more conservative pension fund investment strategy, and allow a closer match of pension asset and liability volatility.
Based on its current financial strength, Exxon Mobil has the financial resources to reduce the underfunding. Pension liabilities represent only 5.8% of the company's $336.7 billion in assets on its balance sheet, and are close to its 2015 net income of $16.5 billion, according to the 10-K. But fortunes can turn. The previous year its net income was double that, at $33.6 billion.
Exxon Mobil management might have a corporate financial reason for having a funded level deficit that serves the company and shareholders to better advantage than a fully funded status, without adding any risk to the pension plan or benefits to its participants. As its latest 10-K, filed Feb. 24, 2016, notes, the company has been in compliance with all funding requirements under the Employee Retirement Income Security Act. But without some transparency, its financing technique for managing its pension plan funded level is a challenge for outsiders to reconcile with potential trade-offs in possibly higher PBGC contributions, restrictions on benefit increases and payout choices as well as an adverse impact on the corporate balance sheet.
In defense of the underfunded status, Scott J. Silvestri, senior corporate media relations adviser, said in an e-mail, “Our pension plans meet or exceed required funding levels as measured by relevant actuarial and government standards. We generally fund to a level that avoids both a variable rate PBGC premium and any restrictions on the operations of our plan.”
Without knowing the reason, there appears to be a disconnect between the attention to good management that led to corporate financial strength and strengthening the funded level of the pension plan.