Corporations pour assets into funds

U.S. corporations plan to contribute more than $26.8 billion to their pension funds this year, according to an analysis by Pensions & Investments tracking 10-K filings with the Securities and Exchange Commission of companies that said they would contribute $100 million or more.

Among these 64 companies, seven said they would contribute at least $1 billion each, based on 10-K filings through March 1. The P&I review covers 85% of S&P 500 companies that have filed 10-K statements.

United Parcel Service Inc., Atlanta, promised the most money at $2.3 billion for U.S. defined benefit plans vs. $2.5 billion in 2016. The funding ratio was 76% as of Dec. 31, down from 78.4% a year earlier.

FedEx Corp., Memphis, Tenn., said it will contribute $2 billion to U.S. plans during the fiscal year that began June 1, 2016. FedEx's contribution is noteworthy because the company said $1 billion of that planned contribution will come from a $1.2 billion bond offering.

The company made $726 million in pension contributions during the fiscal year that ended May 31, 2016. The funding ratio was 83.6% as of May 31, 2016, vs. 85.4% a year earlier.

The third-biggest contributor is General Electric Co., Boston, which will inject $1.72 billion into the GE Pension Plan this year. The company contributed $330 million in 2016. The funding ratio at the end of 2016 was 64.2%, down from 66.5% as of Dec. 31, 2015.

With few exceptions, every company's U.S. pension plan tracked by P&I reported a decline in their discount rates, which measure projected pension obligations, between 2015 and 2016.

The median discount rate for U.S. pension plans was 4.2% in 2016, compared with 4.5% in 2015. Three companies provided the discount rate as a range and were not included in the median calculations.

Pension experts said declining discount rates are no surprise because they reflect declining interest rates.

The median funding ratio in 2016 for the P&I sample was 81.1%, compared with 80.2% in 2015. Among these plans, 34 had lower funding ratios in 2016 vs. 2015, 28 plans had a higher ratio, and two were unchanged.

Pension experts say it's still too early to predict trends for 2017, but they say U.S. funding ratios have stabilized in recent years among the pension plans of the largest corporations.

For example, aggregate funding ratios of 410 companies within the Fortune 1000 hovered between 77% and 84% from 2007 to 2016 (with one outlier at 89% in 2013), said a February report by Willis Towers Watson PLC using 10-K statements. “They're leveling off,” said Alan Glickstein, a Dallas-based senior retirement consultant, noting that U.S. plan ratios were 81% in 2014 and 2015 and an estimated 80% in 2016.

Funding ratios basically have declined in step with declines in U.S. average discount rates for the 410 companies over that nine-year period, said the Willis Towers Watson report. From a peak of 6.29% in 2008, the average discount rate for measuring U.S. pension obligations dropped fairly steadily each year, reaching an estimated 4.07% in 2016.

The report said the estimated year-end 2016 funding ratio would have been worse — about 77% instead of 80% — without a surge in interest rates during the last few months of the year. Yields on high-quality corporate bonds climbed steadily from August through November, the report said.

Research by Milliman Inc., tracking the 100 largest corporate DB plans on a monthly basis, showed a slight gain last year with a funding ratio of 79.9% at the end of January 2016 vs. a ratio of 81.1% at the end of December.

This year started “optimistically,” said a Milliman report, published in February, noting that the funding ratio for the end of January 2017 was 81.6%.

As discount rates go down, liabilities go up. Although discount rates are the dominating factor in determining funding ratios, their impact can be offset by a strong equity performance among pension plan portfolios, said Zorast Wadia, a New York-based principal and consulting actuary for Milliman.

That's what happened to Pfizer Inc., New York.

The funding ratio for its U.S. qualified plans was 80.8% at the end of 2016 vs. 77.9% a year earlier, even though its discount rate dropped to 4.3% from 4.5%.

“The favorable change in the funded status of our U.S. qualified plans was primarily due to an increase in the actual return on assets, partially offset by plan losses resulting from the decrease in the discount rate at the end of 2016,” Pfizer's 10-K statement said. The U.S. plan had a 40.1% equity allocation last year.

Pfizer also illustrates efforts by companies to contribute more than the required minimum in an effort to reduce the fees they pay the Pension Benefit Guaranty Corp. based on their underfunded plans.

Of the $1.16 billion contribution Pfizer announced for its U.S. plans in 2017, the company made a $1 billion voluntary payment in January that “was considered pre-funding for future anticipated mandatory contributions and is also expected to reduce Pension Benefit Guaranty Corp. variable rate premiums,” its 10-K statement said. (Pfizer said it also planned to contribute $175 million to its non-U.S. plans in 2017.)

“It's very costly for companies to maintain underfunded plans,” said Matt McDaniel, Philadelphia-based partner and head of defined benefit risk for Mercer LLC. The PBGC variable-rate premium was 0.9% each year through 2013, he said. It was 3% in 2016 and is up to 3.4% this year. It should reach approximately 4% in 2018 and 4.4% in 2019, he said.

In recent years, companies have been “looking to pay more than the minimum funding requirements to get a handle on PBGC payments,” Milliman's Mr. Wadia added. “They want to get to fully funded status sooner to offset PBGC fees.”

The three remaining companies with plans to contribute $1 billion or more in 2017 are:

• Delta Air Lines Inc., Atlanta, will contribute $1.2 billion to DB plans, just under the $1.32 billion it contributed in 2016. The airline had announced in May 2014 that it wanted to contribute at least $1 billion per year to the plans to reach an 80% funding ratio by 2020. The plans were 49.4% funded as of Dec. 31, up from 45.5% a year earlier.
• Exxon Mobil Corp., Irving, Texas, said it will contribute $1.1 billion this year — $560 million to U.S. plans and $540 million to non-U.S. plans. Last year, it contributed a total of $2.61 billion, of which $2.07 billion was for U.S. plans and $492 million was for non-U.S. plans. The funding ratio of U.S. plans was 64.1% as of Dec. 31 vs. 56.1% at the end of 2015. The funding ratio for foreign plans was 75.6% to end 2016, up from 73.3%.
• Ford Motor Co., Dearborn, Mich., announced it will contribute $1 billion to its non-U.S. plans. “Based on current assumptions and regulations, we do not expect to have a legal requirement to contribute to our major U.S. pension plans in 2017,” Ford said in its 10-K.

Ford's global pension contribution last year was $1.476 billion, of which $130 million was for U.S. pension plans and the rest was for non-U.S. plans. The funding ratio for U.S. plans was 93.3% at year-end 2016 vs. 91.8% for year-end 2015. The ratio for non-U.S. plans was 86.2% at year-end 2016 vs. 84.8% at year-end 2015.

Last year's biggest contributor, General Motors Co., Detroit, will contribute $970 million to non-U.S. DB plans in 2017.

“Based on our current assumptions, over the next five years we expect no significant mandatory contributions to our U.S. qualified pension plans and mandatory contributions totaling $1.8 billion to our Canada and U.K. pension plans,” GM said in its 10-K. In 2016, GM contributed $2.054 billion to its U.S. plans and $1.033 billion to its non-U.S. plans.

GM's U.S. plans had a funding ratio of 89.5% at the end of 2016 compared to 85.4% at the end of 2015. The non-U.S. plans had a funding ratio of 54% at Dec. 31, 2016 vs. 54.7% at year-end 2015.