Drop in Rates Swells Pension Burdens in U.S.-Vipal Monga

Companies struggle to close funding gap, avoid big rise in payments to government insurer

Illustration: John W. Tomac

The U.K’s surprise vote to leave the European Union took a bite out of corporate pension plans in the U.S., as investors fled stocks for the safety of bonds last month, pushing interest rates lower.
Under accounting rules, the declining rates triggered an increase in pension obligations for companies with defined-benefit plans, which offer retirees a set payout.
Now, those companies are pursuing a variety of tactics as they struggle to close the resulting gap in pension funding and to avoid steep increases in premium payments to the nation’s pension insurer.
The combined pension deficit for S&P 1500 companies ballooned to $568 billion at the end of June, a $164 billion increase from the end of 2015, according to Mercer, a benefits consulting firm.
And companies could have large holes to plug by the end of year, when they typically complete their funding calculations.
“It’s brutal,” said Alan Glickstein, senior retirement consultant at Willis Towers Watson.
But the market’s turmoil could help fatten the coffers of the U.S. Pension Benefit Guaranty Corp., which backstops the private-sector pensions that cover about 40 million Americans.
The federal agency collects a fixed fee for each person enrolled in private-sector pension plans and a separate fee, or variable premium, for every dollar that pension plans are in deficit.
So, there could be a fee windfall heading its way in coming months and years as pension deficits balloon.

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Those fees were already on the rise. Congress passed increases in the Bipartisan Budget Act of 2015, mandating a 25% increase in the fixed fee between 2016 and 2019 for plans sponsored by single employers. Variable rates will rise roughly 37% over that period.
Last year, the agency received some $4.1 billion in premium revenue from those plans, up 8.5% from 2014, reflecting prior premium increases.
Many consultants and plan managers say the PBGC’s premium revenue, all of which comes out of corporate pockets, will jump again this year.
As they scramble to close their pension funding gaps, some companies are exploiting low interest rates to borrow cheaply in bond markets.
Others could step up plans to transfer pensions off their books entirely by paying insurance companies to take over those obligations, said Caitlin Long, a pension expert.
Newspaper publisher McClatchy Co. said in February it would contribute $47 million of real-estate assets to its pension plan to boost funding and reduce fees.
In February, General Motors Co. sold $2 billion of bonds, and pumped the money into its pension plan. One investment banker at a major bank said he expects similar deals to come to market as the year progresses.
Chemical maker Chemtura Corp. shifted part of its pension plan to an insurer earlier this year, citing rising PBGC fees as a reason.
Pittsburgh-based specialty-material manufacturer Allegheny Technologies Inc. is considering doing the same with some of its pension, said Patrick DeCourcy, the chief financial officer, in an earnings call in April.
The potential pension deal would “help to lower the burden of significantly escalating premium charges from the PBGC,” said Mr. DeCourcy, according to a transcript of the call.
Such deals are expensive, however, and take a lot of time to put together, said Ms. Long.
In the interim, many companies could simply tap bond markets for a loan.
Not only are interest rates low, but interest payments on bonds are tax deductible, and companies don’t have to pay additional fees to the PBGC. “I would think this is an environment that companies would find compelling,” one banker said.
But companies are continuing to offload their pension burdens. Paint manufacturer PPG Corp. decided to transfer some of its pension plan to Massachusetts Mutual Life Insurance and Metropolitan Life Insurance Co. partly to avoid the rise in PBGC premiums, according to finance chief Frank Sklarsky.
Congress approved an increase in PBGC fees as part of an accounting maneuver that allowed it to fund the 2015 federal budget. Any fees that go to the PBGC count as revenue for the federal government, helping to offset total spending.
One PBGC official said the agency would rather see companies fully fund their pensions than pay big fees.
“We prefer if people fund up their plans,” the official said. “It’s in the participants’ interests for the plans to be fully funded.”

Culled from wallstreet