4 December 2022

Low Rates Force Companies To Pour Cash Into Pensions

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Ford Motor Co. expects to spend $5 billion this year shoring up its pension funds, almost as much as the auto maker spent last year building plants, buying equipment and developing new cars.

The nation's second-largest auto maker is one of a who's who of U.S. companies pouring cash into pension plans now being battered by record low interest rates. Verizon Communications Inc. contributed $1.7 billion to its pension plan in the fourth quarter and—highlighting companies' sensitivity to this issue—Boeing Co. now reports "core earnings" to separate out pension expenses.

"It is one of the top issues that companies are dealing with now," said Michael Moran, pension strategist at investment adviser Goldman Sachs Asset Management.

The drain on corporate cash is a side effect of the U.S. monetary policy aimed at encouraging borrowing to stimulate the economy. Companies are required to calculate the present value of the future pension liabilities by using a so-called discount rate, based on corporate bond yields. As those rates fall, the liabilities rise.

Of course, low interest rates also help companies. Ford, for instance, can borrow money cheaply and use it to offer cut-rate loans or other discounts to help sell its cars. Ford borrowed $1.2 billion to contribute to its pension.

When interest rates rise again, the pension shortfalls should narrow and could even become surpluses. But when that will happen is difficult to predict. The Federal Reserve has committed to keeping rates low for another two years at least.

Pension plans became popular in the U.S. in World War II as a means of compensating workers rather than using pay raises.

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