U.S. corporations plan to contribute a total of about $21 billion to their global pension plans in 2020, according to Pensions & Investments' analysis of S&P 500 companies that announced contributions of at least $100 million.
That total, however, reflects companies' expected contributions disclosed in their 10-K filings with the Securities and Exchange Commission between Feb. 3 and March 3, before the market impact of the COVID-19 pandemic became painfully clear.
Whether companies will actually contribute more or less than that amount has yet to be seen, considering current market volatility and the potential of funding relief measures that some are advocating for, industry experts say. President Donald Trump signed the Coronavirus Aid, Relief and Economic Security Act on March 27, which included giving companies a one-year holiday from making 2020 pension contributions, although other funding relief measures were not included.
Among the 51 10-K filings P&I reviewed for 2020, four corporations said they would contribute at least $1 billion each to their global pension plans.
Three of those four are Pfizer Inc., New York, which plans to contribute $1.28 billion to its U.S. qualified plans, $189 million to its U.S. non-qualified plans and $172 million to its non-U.S. plans; Chevron Corp., San Ramon, Calif., which plans to contribute about $1.25 billion to its U.S. pension plans and $250 million to its non-U.S. plans; and United Parcel Service Inc., Atlanta, with $1 billion to its U.S. plans and $62 million to its non-U.S. plans.
Leading that pack by some distance is General Electric Co., Boston, with the most ambitious pension contribution plan of 2020, which accounts for about a quarter of the overall total planned contributions for the year.
GE said in its 10-K filing it will contribute between $4 billion and $5 billion to the GE Pension Plan, its primary U.S. pension plan, and $500 million to other pension plans in 2020.
The contributions are the result of GE's October announcement that it would freeze its U.S. pension plan for about 20,000 salaried employees and its U.S. supplementary pension plan for some 700 employees, effective Jan. 1, 2021.
At the time, GE said the actions were being made in an attempt to reduce GE's pension deficit by a range of $5 billion to $8 billion and its industrial net debt by $4 billion to $6 billion.
The contribution prefunds GE's minimum required contributions for 2021 and 2022 and will be funded by a portion of the $38 billion in cash sources collected from the sale of its BioPharma and Baker Hughes businesses and the selling of GE Transportation, which will merge with Wabtec Corp.
Brian K. Langenberg, principal and founder of analyst firm Langenberg & Co. LLC, Chicago, said in an October interview that GE "is under some distress," which means "they have to sell assets."
GE contributed slightly more than $1 billion to all its pension plans in 2019 and $6.8 billion in 2018. As of Dec. 31, according to the filing, GE's principal pension plan assets totaled $52.63 billion, while projected benefit obligations totaled $71.76 billion, for a funding ratio of 73.3%, up from 73% a year earlier.
Aside from the large GE contribution, most corporations reduced their expected contributions for 2020 when compared with 2019 and 2018. The 46 companies P&I analyzed at the beginning of 2018 planned to contribute a combined $17.4 billion to their plans, and in 2018, 66 companies said they would contribute more than $100 million, for a total of $38 billion.
Among the 10-K filings analyzed, for example, Caterpillar Inc., Peoria, Ill., which contributed $1.5 billion to its U.S. plans in 2019, expects to contribute only $40 million to those plans in 2020. The company expects to contribute $150 million to its non-U.S. plans in 2020, compared with $143 million last year. As of Dec. 31, U.S. pension plan assets totaled $15.99 billion, while projected benefit obligations totaled $17.77 billion, for a funding ratio of 90%, up from 80% a year earlier.
Other companies that made large contributions in 2018 or 2017 have not had to make any minimum required contributions this year or last year.
Companies made those large contributions in 2018 and 2017 for the most part to take advantage of tax breaks that were set to expire due to the passage of the Tax Cuts and Jobs Act, signed into law by Mr. Trump in December 2017. The law reduced the corporate tax rate to 21% from 35%.
Because tax law allowed plan sponsors to deduct a portion of their pension contributions based on its tax rate, corporations poured billions into their pension plans to meet the Sept. 15, 2018, tax deadline to deduct contributions at the higher 2017 rate.
Because many corporations had fulfilled their minimum required contributions for multiple years, the number of companies expecting to contribute $100 million or more to their plans has fallen from a peak of 66 companies in 2018.
Overall, the S&P 1500 companies that have defined benefit plans contributed a total of about $70 billion to those plans in fiscal year 2018, said Scott Jarboe, a Washington-based partner in Mercer's U.S. wealth business, in a telephone interview. That total dropped to about $45 billion in fiscal year 2019, he said.
"When you make those extra contributions, in some cases you can use those contributions to give you a little bit of relief for a number of years," Mr. Jarboe said.
It is likely too soon to tell whether the market downturn will lead to fewer contributions since the minimum required contributions for 2021 will be calculated as of Dec. 31 of this year.
Bethesda, Md.-based Lockheed Martin Corp., for example, contributed $5 billion to its U.S. pension plans in 2018, which included required and discretionary contributions. The company originally announced its intention to do so in January 2018, well above the $1.5 billion it originally announced for the year in October 2017 before the passage of tax reform.
Lockheed Martin said at the time it would not have to make any further contributions to its U.S. plans until 2021.
UPS also made an additional contribution of $5 billion to its U.S. plans at the end of 2017 to bring its total to $7.3 billion for the year.
Other corporations were also able to accelerate their contribution schedules and reduce or eliminate the need for contributions in 2019 and 2020.
Additionally, spectacular investment returns offsetting lowering discount rates in 2019 reduced the perception of a need for contributions in 2020.
The S&P 500 total return index increased 28.9% and the MSCI EAFE total return index increased 18.4% in the year ended Dec. 31, while the typical discount rates for plans as measured by Mercer's yield curve decreased 101 basis points during the period to 3.18%.
The estimated aggregate funding level of S&P 500 company-sponsored pension plans was 88.6% as of Dec. 31, up from 87.5% a year earlier, according to Wilshire Consulting.
The story since then, however, is a marked contrast to the halcyon days of just over three months ago. As of March 31, Wilshire Consulting's estimated aggregate funding level plummeted to 79.2%, a dramatic drop of 9.4 percentage points in just three months.
The fall in funding ratio over the three months is attributed to an estimated 7.5% drop in asset values and a 3.8% increase in liability values.
In March alone, asset values dropped 7.3%, partially offset by a 4% decrease in liabilities.
Despite 2020 appearing to be a potential disaster for the funded status of corporate plans, additional contributions beyond those that have been announced are unlikely, said Royce Kosoff, Philadelphia-based managing director, retirement, for Willis Towers Watson PLC, in a telephone interview.
"The goal of cash preservation of these organizations is much more at the forefront and you don't see the pension conversation front and center," Mr. Kosoff said.
Even if companies want to issue debt in a rate-friendly environment to fund further cash contributions, they are unlikely to do so, he said.
"Many just can't (access the debt market) now, where spreads are and where rates are," Mr. Kosoff said. "Even if companies wanted to, it's not feasible for most. They're needing the dollars for other (activities) and the inability to tap the markets has put that on hold."
Even announced contributions could be in doubt. Representing one of the hardest-hit industries, for example, is Delta Air Lines Inc., Atlanta, which said in its 10-K filing it expects to make a voluntary contribution of $500 million in 2020.
Delta has no minimum required contribution for the year, it said in the filing. The requirement is based on the funding level at the beginning of plan year 2020, which rose to 74.7% from 67.9% a year earlier.
Delta officials could not be immediately reached to comment on whether that voluntary contribution will still be made this year.
Mercer's Mr. Jarboe thinks corporations like Delta will take advantage of the one-year contribution holiday enacted as part of the CARES Act.
"We think it is reasonably likely that many plan sponsors who otherwise had contributions required during 2020 will delay them until late in 2020 or (Jan. 1)," he said.
"Individual circumstances will vary depending on the magnitude of impact, and the availability of short-term cash. For industries hit the hardest, we believe it is highly likely," Mr. Jarboe said. "Keep in mind that the current relief is very temporary — and has virtually no impact on the expected contributions over the next several years — this is therefore a 'pay now or pay shortly' issue. So while the 2020 opportunity to delay is very welcome to most, this does not materially change medium-term planning."
Industry representatives, meanwhile, are calling for relief for corporations like Delta in other forms.
Corporate U.S. pension plan contribution deadlines should be extended and the beginning of phasing out of funding relief measures enacted as part of 2012 MAP-21 legislation should be deferred, said Martine A. Ferland, president and CEO of Mercer, in a March 18 letter to members of the Senate Finance Committee.
Mercer's Mr. Jarboe said: "We've got broader economic concerns and specific company concerns to get things up and running faster, and while the underlying economics of the defined benefit program won't change given it is such a long-term commitment, delaying or giving the flexibility to delay is very appropriate."
Among the proposals in Ms. Ferland's letter was the extension of due dates for all required pension contributions, including quarterly payments due as soon as April 15, until at least the end of the year. With the CARES Act passed, that proposal has seen fruition. Other proposals, however, have not seen any actions taken.
Also in the proposal is a deferment of the beginning of the scheduled phaseout of interest-rate-stabilization measures enacted by Congress in 2012 to provide funding relief following the financial crisis and the plummeting of corporate bond yields beginning in 2011.
The measures, part of the Moving Ahead for Progress in the 21st Century Act, or MAP-21, signed into law by then-President Barack Obama in July 2012, allowed corporate plan sponsors to take a 25-year historic average of corporate bond rates to determine a rate within a 10% range, or corridor, of the two-year average of corporate bond index rates to calculate their pension liabilities.
The beginning of the phaseout of those provisions is currently set for 2021. Ms. Ferland's letter requests deferring the beginning of the phaseout to 2026, along with narrowing the range of the two-year average to 5% from 10%. That request, however, has yet to be addressed by Congress.
