Among the many effects on corporate finance from the Tax
Cuts and Jobs Act is a greater motivation to address problems with defined-benefit
(DB) employee pension plans. Thanks also to the savings from a
lower corporate tax rate for 2018, senior finance executives think that this
year may be an opportune time to reduce the liability risks associated with
their companies’ DB pensions.
Those were among the important findings of a recent CFO
Research study on how the new tax law is influencing a range of pension-related
The online survey, conducted in collaboration with
Prudential Financial, drew 127 responses from finance executives whose
companies have DB plans for current or former employees. This is the eighth
consecutive year Prudential has surveyed CFOs on pension issues.
Respondents came from a variety of industries, led by
financial services/real estate, health care, and auto/industrial/manufacturing.
They consisted mostly of chief financial officers, directors of finance, and
vice presidents of finance. A majority of respondents came from companies with
$250 million to more than $5 billion in annual revenue.
Among the top conclusions of the research: Senior finance
executives are using the new tax law’s benefits to ramp up DB plan funding.
Under the new tax rules, businesses have until mid-September 2018 to deduct
pension-plan contributions at the 2017 corporate tax rate of 35%. After that,
the new 21% rate kicks in.
Not surprisingly, about three-quarters (74%) of survey
respondents said their organization was “very likely to make a substantial DB
plan contribution” in time to take advantage of the larger deduction.
The survey results match what Rohit Mathur, head of global
product and market solutions for Prudential’s pension risk transfer business,
is observing in the market.
“A number of companies are accelerating pension
contributions,” he says. “We are also noticing an increasing interest in
pension risk transfers among plan sponsors.”
Even after the September deadline, companies can use
savings from the significantly reduced corporate tax rate to fund their
pensions at higher levels.
In the survey, 64% of respondents said they were “very
likely to use the tax savings from the new law to increase funding of our DB
pension plan(s).” (See Figure 1, at right.)
The new law also includes a provision allowing U.S.-based
multinationals to repatriate foreign earnings at tax rates far lower than the
35% that applied in the past. Companies can take advantage of a one-time
repatriation at the rates of 15.5% for cash holdings and 8% for non-liquid
About a quarter (24%) of survey respondents said they
planned to use repatriated capital to bolster their DB funding levels.
Among survey respondents at the companies that expect the
TCJA to generate excess income, 29% said they expected to use the funds to
minimize liability risk, through such efforts as boosting retiree health-care
The study also found that plan sponsors were considering
whether to alter their asset management strategies, as well as whether to transfer
pension obligations to an insurance company.
The decision to improve the funding levels of DB plans
isn’t solely an outgrowth of the new tax policy. Plan sponsors have long
struggled to generate sufficient returns to offset increasing liabilities from
persistently low interest rates and increasing lifespans. But the sponsors are
now contending with rapidly changing conditions, including rising costs and
For example, the premium levied by the Pension Benefit
Guaranty Corp. (PBGC) is on the upswing. The variable-rate component of the
premium, calculated using a DB plan’s unfunded obligations, will increase from
this year’s $38 per $1,000 of unfunded vested benefits to $42 per $1,000 in
The variable-rate increase has been an annual ritual since
2013, when the rate stood at $9 (where it had been since 2007). Over the past
six years the per-participant component of the premium has increased by almost
DB plan sponsors are also under pressure to grow plans’
investment returns, thanks to the life-expectancy increases as reflected in
Internal Revenue Service mortality tables.
In the Prudential survey, 70% of respondents agreed that
“the recent changes in actuarial mortality assumptions, and the prospect of
further changes, are creating ‘longevity risk’ for my organization that places
additional pressure on our DB funding levels.”
Shifting the Risk
Overall, the growing expense of maintaining DB plans along
with the potential risks from underfunding are driving senior finance
executives to consider pension risk transfers.
Companies with well-funded plans can offload some or all of
their pension obligations to an insurance company as a way to reduce risks and
administrative expenses, including PBGC premiums. In return, sponsors purchase
a group annuity contract for plan participants.
In the survey, 62% of respondents agreed that once their
“DB pension plan becomes well-funded,” their organization will be “very likely
to execute a full or partial pension risk transfer to an insurance company.”
In sum, by skillfully taking advantage of the TCJA, plan
sponsors can accelerate DB plan funding and, in the short term, claim
deductions on their contributions at a higher rate. By controlling their risks
and costs, senior finance executives can stabilize and strengthen their
companies’ DB pension plans. That shelters the plans from sources of volatility
and prepares them to be delivered into the hands of a third party that can
reliably serve participants in the long run.
Finally, while DB plan funding and liability management was
a core concern of the surveyed CFOs, other financial priorities will also
receive a boost from the TCJA.
For example, many finance chiefs said they were likely to
utilize newly accessible capital for the benefit of the enterprise, including
accelerating capital expenditures and returning capital to shareholders. (See
Figure 2, above.)
For CFOs, figuring out which investment strategies will
have the most long-term benefit for their companies is indeed a good problem to
here for the original article from CFO.