13 December 2018

Corporate Pension Funds Need More Money

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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.

Click here for the original article from Chief Investment Officer.

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