Employer contributions to corporate defined benefit plans are expected to be lower this year because a number of companies in 2018 opted to take advantage of the 2017's tax law. That left more plans closer to being fully funded.
"2018 is when the new tax reform rules became effective for plan sponsors. So it made sense to take advantage of those deductions and accelerate their contributions," said Scott Jarboe, a partner in Mercer's U.S. wealth business in Washington.
The Tax Cuts and Jobs Act, which was signed into law by President Donald Trump on Dec. 22, 2017, reduced the corporate tax rate to 21% from 35%. Corporations had until Sept. 15 to deduct those contributions at the higher 2017 rate.
"What we saw in 2018, the tax law changed, corporations got a 14-percentage-point change in their tax rate, so making a contributions for the 2017 plan year was a tax-deductible contribution at 35% as opposed to 21%," said Ned McGuire, managing director at Wilshire Consulting, Santa Monica, Calif. "Plans took advantage of that tax deferential to prefund as many years as possible at the highest possible rate."
U.S. corporations plan to contribute some $17.35 billion to their global pension funds this year, according to Pensions & Investments' analysis of individual S&P 500 companies that announced expected contributions of at least $100 million.
Among the 46 companies P&I analyzed, two said they would contribute more than $1 billion and another eight companies said they would contribute between $500 million and $1 billion in 2019, based on 10-K filings with the Securities and Exchange Commission through March 14. Those 46 companies contributed a total of $26.1 billion to their global pension funds in 2018, including 10 that contributed nearly $1 billion or more.
By comparison, last year P&I reported 66 S&P 500 companies expected to contribute at least $100 million to their global plans, totaling $37.8 billion. Those same 66 companies contributed $39.3 billion to their plans in 2017.
"If we look at pension plan performance in 2018, the funded status improved for plans in general," Mr. Jarboe added.