Corporate funds face higher liabilities due to COVID-19 – Moody’s

U.S. corporate defined benefit plans face higher liabilities in the coming months as the impact of the COVID-19 pandemic becomes apparent, according to a report from Moody's.

The report released Thursday is one of a series of in-depth sector reports from the credit agency and says rising pension liabilities will put more pressure on cash flow in sectors hardest hit by the pandemic, particularly in the airline and auto industries.

With discount rates plummeting to what Moody's said is an all-time low of 2.26% as of July 31, the 50 companies with DB plans sampled by Moody's will see their adjusted debts rise by $120 billion.

The report also said that while the CARES Act provides some short-term relief for corporations with DB plans, the help is limited.

The Coronavirus Aid, Relief and Economic Security Act, signed by President Donald Trump on March 27, provides companies the option of a one-year holiday from making 2020 pension contributions, with interest accrued, until Jan. 1, 2021.

American Airlines Inc., Fort Worth, Texas, is among the companies within most-affected sectors that plans to take advantage of the holiday. The company announced in April it plans to defer its minimum required pension plan contributions for 2020, totaling $196 million, under the provisions of the CARES Act.

The Moody's report notes, however, that the benefits of the holiday are limited since so many companies already contributed well over the minimums required in 2017 and 2018, leading to smaller minimum required contributions in 2020.

The Tax Cuts and Jobs Act, signed into law by President Donald Trump in December 2017, reduced the corporate tax rate to 21% from 35%. Many corporations made several years' worth of contributions before the tax deadline of Sept. 15, 2018 in order to deduct portions of their contributions at the higher tax rate.