Tax reform, PBGC fees drive U.S. companies to open their wallets
U.S. corporations plan to contribute some $32 billion to their global pension funds this year, according to Pensions & Investments' analysis of individual companies that announced contributions of at least $100 million.
Among the 58 companies P&I reviewed, six said they would contribute more than $1 billion each and another 11 companies said they would contribute between $500 million and $1 billion in 2018, based on 10-K filings with the Securities and Exchange Commission through March 14. Those 58 companies contributed a total of $34.2 billion to their global pension funds in 2017, at least $8 billion of which took place in the fourth quarter.
This year's review covered 99% of S&P 500 companies that have filed their annual 10-K statements.
General Electric Co., Boston, promised the largest contribution of the companies reviewed, announcing in an investor update in November that it planned to contribute $6 billion to the GE Pension Plan, its primary U.S. plan, in 2018. According to its newly filed 10-K, GE contributed a total of $2 billion to its pension plans in 2017 and had a U.S. plan funding ratio of 67.2% as of Dec. 31, up from 64.2% the previous year.
Lockheed Martin Corp., Bethesda, Md., said it will contribute $5 billion to its U.S. defined benefit plans in 2018 after contributing $46 million in 2017. Lockheed Martin said in its 10-K filing it will not have to make any further contributions until 2021. As of Dec. 31, the company's U.S. plan funding ratio was 68%, down from 69.7% the previous year.
And FedEx Corp., Memphis, Tenn., plans to contribute $1.75 billion to its U.S. defined benefit plans in 2018. In its previous fiscal year, FedEx contributed $2 billion. As of May 31, 2017, FedEx's U.S. defined benefit plans had a funding ratio of 89.5%, up from 82.8% the previous year.
Tax bill fuels surge
Matt McDaniel, Philadelphia-based partner in Mercer's U.S. wealth business, said in an interview that corporate interest in accelerating contributions — contributing several years' worth of required contributions in one year — is high.
One primary reason corporations have been accelerating contributions since the beginning of last year is the anticipation of looming tax reform, Mr. McDaniel said.
"Tax reform passed very late in the year in 2017," Mr. McDaniel said. "A number of plan sponsors anticipated tax reform, another set of sponsors weren't really sure. We really didn't get that finality."
The Tax Cuts and Jobs Act, signed into law by President Donald Trump on Dec. 22, reduced the corporate tax rate to 21% from 35%. Current tax law allows a plan sponsor to deduct a portion of its pension contributions based on its tax rate.
Corporations have until Sept. 15, the final tax deadline, to deduct those contributions at the higher 2017 rate, Mr. McDaniel said. "It's the last gasp in the next six months to take advantage of that. We're working with a lot of plan sponsors on that."
Matthew Siegel, Stamford, Conn.-based senior consultant with Willis Towers Watson PLC, also sees companies mulling additional contributions.
"In 2018, we're still seeing a lot of organizations contemplating additional contributions that can be deducted in 2017," said Mr. Siegel, "and we've seen a number of large ones come out that, in effect, they're going to accelerate what they see as expected contribution requirements over the next several years."
Mr. McDaniel also noted that while companies are required to report expected contributions, "there's nothing that stops them contributing more or less than that amount."
A number of corporations followed that pattern in 2017, including United Parcel Service Inc., Atlanta, which announced in February it had contributed an additional $5 billion to its U.S. plans at the end of 2017, which was in addition to the $2.3 billion it originally announced in the 10-K filing, Delta Air Lines Inc., Atlanta, which contributed a total of $3.56 billion to its U.S. defined benefit plans in March and April of 2017, well above the $1.2 billion the company had announced in its 10-K filing on Feb. 13, 2017, and E.I. du Pont de Nemours & Co., Wilmington, Del., which announced in a May 2017 SEC filing that it planned to contribute $2.9 billion to its U.S. defined benefit plan in 2017, up from the $230 million in contributions it originally announced its 10-K filing that February.
Last year's total expected contributions among 64 companies whose 10-Ks for 2016 included intentions to contribute $100 million or more was $26.8 billion.
In 2018, Delta said it planned to contribute $500 million to its plans, and DuPont, which as of Aug. 31 merged with Dow Chemical Co., Midland, Mich., to form DowDuPont, plans to contribute $200 million to its DuPont global DB plans.
PBGC hike looms
Many corporations also have accelerated contributions because of the looming hike in variable rates charged by the Pension Benefit Guaranty Corp.
The PBGC's variable rate is based on the unfunded obligations in a defined benefit plan, as opposed to the fixed rate, which is based on the number of participants in the plan. The variable rate, which was as low as $9 per $1,000 of unfunded vested benefits as recently as 2013, is $34 in 2018 and will rise to $42 in 2019.
The median funding ratio among the 58 plans analyzed as of Dec. 31 was 83.2%, up from 79.6% in 2016, an improvement despite lower discount rates, which increase liabilities. The median discount rate in 2017 among the analyzed plans was 3.7% in 2017, down from 4.3% in 2016 and 4.5% in 2015.
The declines in U.S. discount rates had long caused funding ratios to decline. According to a February Willis Towers Watson report, the average discount rate used by Fortune 1000 companies had been dropping ever since its peak at 6.29% in 2008, all the way down to 3.55%.
In that report, Willis Towers Watson said the aggregate funding ratios of 389 companies within the Fortune 1000 that have DB plans improved to 83% in 2017 from 81%.
Willis Towers Watson's Mr. Siegel said the improvement in funding ratios even in the face of falling discount rates was due to two offsetting conditions.
"During 2017, we had discount rates fall maybe 50 basis points or so, but offsetting that was return on assets of, we think, about 13% depending on asset mixes. We also had some benefits in additional changes in mortality tables put out by the Society of Actuaries," Mr. Siegel said.
Based on Willis Towers Watson estimates, Mr. Siegel said, funding ratios as of mid-March have improved perhaps 2 to 3 percentage points above that year-end 83% figure.
"If you look year-to-date 2018 through February, we estimate that discount rates on average have increased about 40 basis points, and we're not seeing much of a change to date in March," Mr. Siegel said.
$1 billion club
The three other companies that plan to contribute more than $1 billion to their pension plans in 2018 are PepsiCo Inc., Purchase, N.Y.; FirstEnergy Corp., Akron, Ohio; and Exxon Mobil Corp., Irving, Texas.
PepsiCo plans to contribute a total of $1.575 billion to its global DB plans in 2018. In its 10-K, the company disclosed it already had contributed $750 million to the plans and planned to contribute an additional $650 million in the first quarter, and another $175 million in discretionary contributions to U.S. and international plans in the remainder of the year. PepsiCo's funding ratio for U.S. plans as of Dec. 31 was 85.1%, down from 86.9% the previous year, and the international plan funding ratio was 99.1% as of Dec. 31, up from 92.6% the previous year.
FirstEnergy contributed $1.25 billion to its qualified pension plans in January to address funding obligations for future years, the company said in its filing. The company contributed $18 million to its pension plans in 2017 and $899 million in 2016. Its 2017 U.S. plan funding ratio was 65.9%, the same as the previous year.
Exxon Mobil plans to contribute $1.21 billion to its global pension plans in 2018 — $490 million to its U.S. plans and $720 million to its non-U.S. plans.
The funding ratio for its U.S. plans as of Dec. 31 was 66.2%, up from 64.2% the previous year. The non-U.S. plans were 76.8% funded, up from 75.6% at the end of 2016.