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Companies actively reducing risks in pensions
February 04, 2013
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TORONTO: Corporate pension funding is always a complicated issue, made even more so now by, of all things, a highway transportation bill. Commonly known by its shorthand name, the MAP-21 Act became law last July. It included a provision that lets companies use an average of interest rates over the prior 25 years when determining how much they have to contribute to their plans to meet funding requirements. (The provision found its way into the bill as a revenue-raising mechanism to offset highway spending.)

That effectively lets companies contribute less into the plans, saving them money. In other words, for plan sponsors’ purposes, rates went up even as in reality they were going down.

“It’s a very awkward relief. I’m not quite sure how anyone came up with this, frankly; you couldn’t make it up,” said Jon Barry, a partner at Mercer. “In 2012 and definitely in 2013 too, all things being equal, funding is quite a bit lower under this relief.”

Not all companies will take advantage of it. Some actuaries say companies that are trying to actively reduce risks in their pensions are unlikely to use it at all.

“You do have plan sponsors in more cash-strapped industries or more cash-strapped companies who will take advantage of it,” said Margaret McDonald, a senior vice president and senior actuary at Prudential Financial. 

UPS said it will face $225 million in pension costs this year, nearly 5 per cent of its forecast earnings. Without knowing what treatment the company has chosen, multiple actuaries said it was entirely possible that contribution would be larger but for MAP-21.

Analysts say that either way, those contribution figures are ultimately more important than the discount-rate charges, in that they represent actual cash coming off the books.

 “It’s important to look at what’s an economic result and not just a reported number based on new mark-to-market rules,” said Keith Schoonmaker, equity analyst at Morningstar. Pension charges wiped out more than $20 billion in fourth-quarter earnings at major American companies, as persistently low interest rates leave some of those with the largest retiree burdens no choice but to assume they need more money now to cover liabilities later.

Actuaries warn there is little chance for improvement on the horizon for defined benefit pension programs, as rates linger at historically low levels and the Federal Reserve shows no inclination to raise them. The only hope, they say, is for rates to turn around - though when, no one really knows. 

Just between AT&T Inc ($10 billion), Verizon Communications ($7 billion) and UPS ($3 billion), pension accounting has led to massive noncash charges in the last few weeks, and those three are not alone. 

It is possible there will be even more before the reporting season ends. Employment lawyers say about 37 per cent of people with retirement benefits still have a defined benefit plan or a mix of defined benefits and a 401(k), with little distinction across sectors.

Reuters

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