The recent federal tax cut has provided corporations with a
windfall that many have used to bolster their defined benefit pension plans.
But a new study warns them not to get too complacent because obligations are
also set to mount.
The study by Cambridge Associates cautioned that “while the
near-term result could be improved funded status for a given plan and company,
it does not promise relaxed contribution obligations going forward.”
The tax law change, which sliced the corporate income levy
to 21% from 35%, has allowed many companies to boost stock buybacks, increase
capital spending, and beef up pension programs.
Compared to public pension plans, the defined benefit
retirement programs for corporate America are well-funded. According to a study
by consulting firm Mercer,
the estimated aggregate funding level of pension plans sponsored by S&P
1500 companies reached 91% in July.
So enter Cambridge with the bad news. Updated mortality
tables from the Internal Revenue Service are expected soon, which could show
retirees living even longer than before, thus raising pension liabilities,
according to the consulting firm. And that, in turn, will put pressure on plans
to contribute even more to their pension programs.
And that’s not all. The discount rates used to calculate
future liabilities, long criticized as unrealistically high, are falling. In
other words, expected investment returns are increasingly being reduced. So,
Cambridge pointed out, higher corporate contributions will be called for to
fill the gap.
Plus, the consultants added, there’s a looming end date for
corporate plans that have been benefiting from “credit balances.” These credits
stem from excess contributions made in previous years, and are used to offset
the need for current contributions. But the credits are about used up.
At least, corporate plans can say they are far better
funded than public ones, whose funding status is about half of the private
sector’s.
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