Thursday, December 14, 2017

Fees Rise for Underfunded Pensions?

Katherine Chiglinsky and Brandon Kochkodin of Bloomberg report, Fees Rise for Underfunded Pensions:
The largest pension plans held by S&P 500 companies face a $348 billion funding gap. As a result, they’re paying higher annual fees to the U.S. Pension Benefit Guaranty Corp., the government agency that backstops plans. “There’s increased awareness that an underfunded plan imposes risk on employees, it imposes risk on shareholders, and it’s getting more expensive,” says Olivia Mitchell, a professor at the University of Pennsylvania’s Wharton School and executive director of the Pension Research Council.

The fees, called variable-rate premiums, are set by Congress and meant to encourage companies to set aside more money in their pension funds. They’ve more than tripled in four years for companies including General Electric Co. and Boeing Co., according to data obtained by Bloomberg News through a Freedom of Information Act request.

GE’s fees surged more than sixfold, to about $238 million, in 2017 from 2012, according to the PBGC data (that doesn’t include the agency’s flat-rate participation fees). Boeing’s bill was $151.7 million, about four times what it paid in 2014. GE and Boeing had the largest pension shortfalls among S&P 500 companies. GE, whose pension fund is short by about $31 billion, said in November it would borrow $6 billion to fund its plan. After Boeing’s fund fell short by about $20 billion at the end of 2016, the company said in July that it would add $3.5 billion of its shares to a scheduled $500 million pension contribution.

Employers have found it “more and more difficult to offer a pension,” says Dennis Simmons, executive director of the Committee on Investment of Employee Benefit Assets, an industry group. “Part of that is because of rising PBGC fees and more difficult regulations.” Booms and busts in the stock market have made it harder for companies to keep up with their contributions. The pensions have become “big, and they’ve been quite volatile since 2000, when we’ve seen some serious ups and downs in the market,” says Peggy McDonald, a senior vice president who works on pension risk transfers at Prudential Financial Inc.

The rising fees and pending Republican tax overhaul legislation are encouraging some companies to build up their funds. Because pension contributions are tax-deductible, it’s more valuable to contribute to a pension while tax rates are higher.

Employers with the 100 largest defined benefit plans added a combined $43 billion to plans last year, compared with just $31 billion the year before, according to Milliman, an actuarial company. Most are eager to get out of the pension business, preferring 401(k) plans, where the employee bears the risk of falling short at retirement. More are offloading their pension plans, paying insurance companies such as Prudential or MetLife Inc. to take them on instead. Such transactions could exceed $19 billion this year, according to industry group Limra. Only about two dozen companies in the S&P 500 have overfunded pensions. Nine of them are banks.

Offloading risk isn’t on the table for every company. Insurers don’t take on obligations from underfunded plans, McDonald says. That means companies need to better fund their plans, limiting those variable-rate premiums, before they can transfer the obligations. “In the short term, these PBGC premiums are having a really significant impact,” she says. “This is in a way an expense-management exercise.”
Those PSGC premiums are having a significant effect but given America's looming corporate pension disaster and that the PBGC deficit in its insurance program for multiemployer plans rose to $65.1 billion at the end of fiscal year 2017 putting the program at risk of running out of money by 2025, there wasn't much of a choice but to increase premiums.

As far as the large companies cited in the article above, GE botched its pension math, one of many factors weighing down its share price this year:

But Boeing's huge pension gaffe has yet to come back and to haunt it as its share price keeps rising to record levels:

We shall see if this trend persists over the next year (I doubt it as the world economy slows) but what is clear is the longer Boeing's pension remains under water, the more expensive it becomes to maintain as PBGC raises its premiums.

There’s a limit to how long Boeing can put off underfunded liabilities. Over the next decade, the company expects to pay out about $46 billion to retirees.

Most companies are looking to shed their defined-benefit plans by cutting them to new employees or  offloading them to insurers if they're fully funded.

The slow disappearance of workplace pensions is part of a larger problem of pension poverty because as more and more workers retire with little to no savings, it will impact aggregate demand and the economy.

On a positive note, the latest Milliman analysis shows corporate pension funding up $7 billion in November, $41 billion in past three months, fuelled by strong gains in stocks and relatively stable rates.

Of course, that could all change next year if the economy starts slowing and rates plunge to new lows.

This is why I agree with Congress which raised variable-rate premiums on all these companies with underfunded pension plans. It's better to prepare for the pension storm that lies ahead.

Below, Republican plans to overhaul the US tax system are stoking demand for longer duration on the part of corporate pension funds, adding fuel to the seemingly inexorable flattening of the Treasuries yield curve (clip from November 21st, 2017).

I think this whole thing of corporate pensions front-running the tax overhaul, driving the yield curve flatter is a bit overdone. The yield curve is flattening because the economy is slowing and inflation expectations keep dropping. There's nothing more to it. 

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