When General Motors Co.’s
pension plan took a big hit earlier this month, it joined hundreds of companies
facing growing pension shortfalls as Americans keep living longer. Longevity
has a downside for those paying the bills, and the higher costs now have to be
reflected on corporate balance sheets because of new mortality estimates
released in October. In its first revision of mortality assumptions since 2000,
the Society of Actuaries estimated the average 65-year-old man today will live
86.6 years, up from the 84.6 it estimated a decade and a half ago. The average
65-year-old woman will live 88.8 years, up from 86.4.
The new estimates won’t affect
many U.S. companies, which long ago shifted their employees to
defined-contribution plans like 401(k)s, which leave workers on their own after
retirement. But they are hitting other big companies with defined-benefit plans
that have to make payments to some former employees for as long as they live.
The changes may also prompt more companies to take steps to reduce the risks
associated with their pension plans, experts say.
When GM announced fourth-quarter
earnings Feb. 4, it said the mortality changes had caused the funding of its
U.S. pension plans to fall short by an additional $2.2 billion and contributed
to significant pension losses that will be filtered into its earnings over a
period of years. The cost is another weight on pension-plan operators already
wrestling with the impact of declining interest rates. Lower rates boost the
current value of the future payments the plans have promised to retirees
because the value of future pension obligations isn’t discounted back to the
present as dramatically.
Some companies will see a
quicker, more concentrated impact than others. Ultimately, the mortality
changes are expected to affect most or all companies with old-style
defined-benefit pension plans that commit to specified payout levels through
their retirees’ lifetimes. The math is pretty straightforward: Longer lives
lead to more pension payments by companies, and thus higher costs. But the
timing of the financial hit varies.
The new mortality assumptions are
having the biggest, most immediate effect on companies like AT&T and
Verizon, which have revamped their pension accounting over the past few years
to show gains and losses in the year they occur. Most companies still smooth
out the changes over a period of years, meaning smaller hits to their profits
in any given earnings report.
Last month, AT&T took a
fourth-quarter pretax charge of $7.9 billion on its pension and retiree benefit
plans. It said the charge stemmed largely from declining interest rates, but it
also cited the new mortality assumptions. In its annual report, filed Friday,
AT&T also said its own update of mortality assumptions boosted its pension
and retiree-benefit obligations by $1.5 billion in 2014.
The changes could lead companies
to increase voluntary contributions to their pension plans. They could also
encourage companies to take such steps as offering lump-sum buyouts to retirees
or transferring pension obligations to insurers to reduce their pension risks.
General Electric Co.
estimated that the new mortality assumptions could cause its retiree
obligations to rise by $5 billion and hurt its profit this year. GE will likely
provide an update in its annual report, a spokesman said. A Securities and
Exchange Commission official recently suggested that companies should tell
investors sooner rather than later about the mortality assumptions’ impact.
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