Finance chiefs will get more time to cover their companies’
pension deficits and more flexibility with the cash they have put into
retirement plans as part of the new Covid-19 aid package.
Market disruptions caused by the pandemic and near-zero
interest rates have made it harder for companies to manage their pension
obligations, especially plans sponsored by a single employer. Low interest
rates contribute to higher liabilities, increasing the amount of funding that
companies need to set aside for pension obligations.
Single-employer plans often promise to pay out fixed sums to
retirees, sometimes over several decades, similar to other defined-benefit
plans. More than 20,000 U.S. companies offer these single-employer plans,
according to consulting firm Mercer LLC.
Many of these plans, which are largely underfunded, have
fared well with the rise in the stock market over the past few months. The
funding level of single-employer plans sponsored by S&P 500 companies rose
roughly 4.7 percentage points to 91.5% at the end of 2020, compared with the
previous year, professional-services firm Aon PLC said. The funded status has
since climbed to 95.3% as of Feb. 28. The estimated aggregate deficit of
single-employer pensions sponsored by S&P 500 companies was $102.1 billion
as of Feb. 28, tumbling 72.8% from the prior year, Aon said.
But as interest rates are expected to remain low for a
while, companies need long-term support to continue making contributions to
their plans and to cover any potential future market volatility or cash crunch,
The $1.9 trillion aid package that President Biden signed
into law earlier this month helps sponsors of single-employer plans hold on to
cash and delay paying off any deficit in their plan over a 15-year period vs.
the current seven-year period. It also set aside about $86 billion for
struggling multiemployer pensions, which are jointly run by unions and
The law creates a more predictable and favorable basis for
measuring the liabilities that ultimately determine the funding obligation,
said Jonathan Price, a senior vice president at the Segal Group Inc., an
employee-benefits consulting firm.
Companies can use as a minimum, a corporate bond yield of roughly
5%, to determine the value of their pension liabilities. Before the law, there
was no such minimum. The floor rate, which is higher than the current market
rate, is expected to reduce short-term contributions that companies need to
make for their plan.
“If you’re a CFO, the ability to, in any given year, not
have an ironclad requirement to put cash into a pension plan is always a good
thing,” said Matt McDaniel, a partner at Mercer.
The law also extends an existing option allowing companies
to revise their funding obligations to help them free up cash. The U.S. government
has provided this flexibility throughout the past decade, most recently in
2015. That option started to phase out earlier this year.
Under the Covid-19 package, companies can redeploy funds
designated for 2019 and 2020 pension contributions, as long as they make those
payments at a later date. The reduction in future pension costs creates an
opportunity to use the cash to offset labor costs and stabilize the business
amid the pandemic. The relief doesn’t pose an advantage to employees, except
that companies could spend the funds on hiring or to avoid layoffs.
Companies also can adopt these changes as far ahead as next
year. The new law will largely start phasing out in 2026.
The option is intended to help chief financial officers and
treasurers struggling to pay into single-employer plans as they invest in their
businesses, Mr. Price said.
Airlines and hotel operators are among the companies that
look to benefit most from the pension-relief measures, as businesses that have
been hit the hardest look to better manage their cash.
United Natural Foods Inc., a Providence, R.I.-based food
wholesaler, is assessing whether to make any changes to its pension contributions
because of the legislation, but doesn’t expect a significant benefit if it did,
CFO John Howard said. “We’re looking at it and I think it provides a little bit
of relief,” he said.
The company’s single-employer plan covers about 27,000 employees,
but is closed to new participants. United Natural Foods said it contributed
$16.1 million to the plan for the fiscal year ended last August and has no
contribution requirements for the current year. The current funding level is
near 95%, a company spokesman said.
Some companies won’t use the new flexibility available to
them, including those winding down their single-employer plans. Those companies
are looking to expedite their contributions, not slow them down, said John
Lowell, a partner at advisory firm October Three Consulting LLC.
About 25% of about 22,520 single-employer plans were closed
to new entrants or accruals in 2017, the latest available data, according to
the Pension Benefit Guaranty Corp., the government’s pension insurer.
“Contributing less means that you will continue to have a
big gap between your assets today and what it’s going to take to terminate the
plan,” Mr. Lowell said.
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