U.S. corporations are planning minimal contributions to
their pension plans in 2022 after strong investment returns, rising interest
rates and legislative relief have improved funding ratios.
They plan to contribute a total of $11.25 billion to their
global pension plans in 2022, according to Pensions & Investments' analysis
of S&P 500 companies that announced contributions of at least $100 million.
The data reflect the companies' expected contributions disclosed in their 10-K
filings with the Securities and Exchange Commission between Jan. 27 and March
1.
Among those corporations, actual contributions to their
global pension plans totaled slightly less than $13 billion in 2021.
Some 33 companies disclosed expected contributions of at
least $100 million this year, down from 50 last year.
A major reason behind the expected decline in contributions
is the significant increase in plans' funding ratios last year.
In its estimate of the aggregate funding ratio of pension
funds sponsored by S&P 1500 companies, Mercer said the ratio increased to
97% as of Dec. 31 from 84% a year earlier. It is the highest ratio the
consultant has estimated since year-end 2007 when the ratio reached 104%. As of
Feb. 28, Mercer's estimate remained at 97%.
While strong investment returns were a primary catalyst in
the aggregate jump in pension plan assets, the real difference maker was higher
interest rates that brought liabilities lower.
The typical discount rate measured by the Mercer Yield Curve
increased to 2.76% as of Dec. 31 from 2.32% a year earlier.
Compare expected U.S. company pension contributions with
P&I's Corporate Pension Contribution Tracker
Scott Jarboe, a Washington-based partner in Mercer’s U.S.
wealth business, said in a phone interview that the improved funding has
lowered minimum required contributions significantly, and funding relief
included with the American Rescue Plan Act of 2021 allowed plan sponsors “to be
able to kick the can down the road longer.”
The ARPA provided interest-rate stabilization and longer
amortization periods for plans. Similar measures originally enacted by the
Moving Ahead for Progress in the 21st Century Act, or MAP-21, signed into law
in 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 was
originally set for 2021. The ARPA narrowed that range of the two-year average
to 5% from 10% through 2025, at which point the corridor begins to gradually
widen until it hits 30% in 2030.
The ARPA also provides for 15-year amortization of funding
shortfalls, up from seven years, for plan years beginning after Dec. 31, 2021.
Contribution holiday
The relief combined with the already-improved funding ratios
creates a multiyear contribution holiday for many corporations, said Michael
Moran, senior pension strategist at Goldman Sachs Asset Management in New York.
“They’re not looking to make contributions in the next few years because they
don’t have contribution requirements and many of them are fully funded,” Mr.
Moran said in an interview.
While minimum funding requirements have plummeted,
corporations do have the option of making discretionary contributions. Current
geopolitical events, however, might also keep corporations from pulling the
trigger on those types of contributions, Mr. Jarboe said.
He noted that the current market volatility that has
resulted from the Russian invasion of Ukraine may be a deterrent.
“Corporations are probably going to be a little more
conservative with cash to make sure they’ve got strong balance sheets and
weather any storm that may be forthcoming,” Mr. Jarboe said.
He also noted that rumored legislation that would increase
the U.S. corporate tax rate might inspire corporations to hold off on making
discretionary contributions. One driver of the current solid funding ratio
among corporate plans was an abundance of large contributions made by companies
in 2017 and 2018.
U.S. corporations for the most part made large contributions
in those two years 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 then-President
Donald Trump in December 2017. The law reduced the corporate tax rate to 21%
from 35%.
Because the law allows plan sponsors to deduct a portion of
their pension contributions based on its tax rate, corporations made multiple
years’ worth of contributions before the Sept. 15, 2018, tax deadline to deduct
them at the higher rate.
If a new law is passed raising the corporate tax rate,
corporations will likely wait until after the applicable deadline to make
higher contributions, Mr. Jarboe said.
The only exception, he said, is that some corporate plan
sponsors might want to make discretionary contributions if doing so will allow
them to terminate their plans. That is, however, unlikely among the large plans
tracked by P&I for this story. Mr. Jarboe said the vast majority of
terminations have been for plans with less than $1 billion in assets.
Billion-dollar contributions
Two corporations said they expect to contribute more than $1
billion to their U.S. pension plans in 2022.
United Parcel Service Inc., Atlanta, in its Feb. 22 10-K
filing, said it planned to contribute just under $1.9 billion to its U.S.
pension plans.
UPS contributed $157 million to the U.S. plans in 2021 and
$2.8 billion to the U.S. plans in 2020.
UPS spokesman Glenn Zaccara said in an email that UPS is
making the contributions above the minimum required level as part of plans
announced last June for the company to achieve an adjusted gross debt/earnings
before interest, taxes, depreciation ratio of about 1.5 times by the end of
2023. “Net pension liabilities are one component of that calculation,” Mr.
Zaccara said. “Maintaining a strong balance sheet is one of our five core
principles at UPS.”
As of Dec. 31, UPS had $56 billion in U.S. pension plan
assets and $61.4 billion in U.S. projected benefit obligations, for a funding
ratio of 91.2%, up from 80.4% a year earlier. The discount rate for the U.S.
plans was 3.13%, up from 2.9% the previous year.
Chevron Corp., San Ramon, Calif., said in its Feb. 24 10-K
filing that it plans to contribute $1.1 billion to its U.S. plans in 2022. The
company contributed $1.55 billion to the U.S. plans in 2021 and $950 million to
the plans in 2020.
As of Dec. 31, Chevron had $9.92 billion in U.S. pension
plan assets and $12.97 billion in U.S. PBO, for a funding ratio of 76.5%, up
from 65.5% a year earlier.
Chevron spokesman Braden Reddall said in an email that part
of the contribution was discretionary. He did not provide further information.
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