Companies feel that the time is right to remove pension obligations from their balance sheets



Finance chiefs are stepping up efforts to remove pension obligations from corporate balance sheets through pension purchases and other financial instruments, using well-funded plans and a respite from last year’s tussle to tackle the Covid-19 pandemic.

Company pension plan sponsors have been buying pensions from an insurer for all or part of their vested benefits employees for years, reducing the plan’s assets and liabilities while strengthening a company’s balance sheet. The size of pension plans often fluctuates due to market volatility and changes in interest rates, which can create unexpected difficulties for CFOs.

Companies spent $ 8.7 billion on retirement insurance in the first half of the year, nearly 30% more than in the same period last year, according to consulting firm Mercer LLC.

At the beginning of the pandemic, many companies paused these transfers as chief financial officers focused on getting cash, working remotely, and fighting Covid in general. Over the past few months, however, the overall level of funding for the plans has improved, partly due to the strength of the stock market. In addition, a March law allowed some single employer plan sponsors to reduce the contributions they would have to make in the coming years.

According to Mercer data, the S&P 1500 sponsored fund ratio for defined benefit plans – those that pay fixed amounts to retirees over the years – rose 14 percentage points to 93% as of July 31, compared to the same period last year. The plans’ total estimated deficit decreased 68% from the year-ago period to $ 178 billion, in part due to a slight increase in high-quality corporate bond yields.

Aerospace giant Lockheed Martin Corp.

, Packaging company Pactiv Evergreen Inc.

and aluminum parts manufacturer Arconic Corp.

are among those companies that have entered into or are considering annuity contracts in the past few months.

“Many plan sponsors say they don’t want to be in the annuity business and want to move those liabilities to a company whose core competency is managing long-term debt,” said Matt McDaniel, partner at Mercer.

Some others have frozen their plans or taken other measures, such as:

Earlier this month, Lockheed Martin said it had $ 4.9 billion in pension obligations for approximately 18,000 U.S. participants in insurer Athene Holding Ltd. transferred to reduce the risk. It is the largest annuity business so far this year, said Mercer.

In July, Pactiv Evergreen agreed to transfer $ 950 million in plan liabilities – approximately 22% of the plan’s estimated benefit obligations – for 16,300 participants to the Massachusetts Mutual Life Insurance Co. balance sheet while the plan is almost fully funded, Chief said Financial Officer and Chief Operating Officer Michael Ragen in a conference call on August 5th.

“The whole idea behind this is that more and more funding is being given to retirement to reduce the risk to our business and the risk to future cash flows,” he said. “So for us a really good result without any disadvantages for the pensioners.”

A Lockheed Martin F-35B fighter jet in Fairford, England. The company announced earlier this month that it had transferred $ 4.9 billion of pension obligations to insurer Athene Holding for approximately 18,000 US participants.


Peter Nicholls / Reuters

The corporate plans have become more financially strong due to the rising stock market. But even the lows of interest rates mean that the money that plans have to put aside for future payments is also bigger.

“For most of the past 20 years, plan sponsors have expected interest rates to go up every day, and they will stay low, keep falling, and cause a lot of pain,” said McDaniel.

Inflation could drive interest rates up significantly and benefit companies with annuities on their books as it would lower the value of their related liabilities and increase the funding of their plans, business consultants say. Rising interest rates could also motivate companies to secure profits by transferring liabilities, these advisors said.

The volume of U.S. pension risk transfers this year is expected to be the largest in years, ranging from $ 30 billion to $ 40 billion, according to corporate pension advisors. It could break a new record, surpassing $ 35.9 billion from 2012. An average of $ 18.5 billion has been retired over the past decade.

William Oplinger, CFO of Alcoa Corp.


Alcoa Corp.

In addition to the risk of pension funds, a pension overhang can weigh on a company’s finances and share price. The split of the aluminum manufacturer Alcoa Inc. in 2016 into two companies gave the new Alcoa Corp. saddled with substantial pension obligations, said CFO William Oplinger. Pittsburgh-based Alcoa worked to reduce it through pension payments, lump sums, and a $ 500 million contribution in April that was funded from the proceeds from the sale of debt. Its global retirement plans are now more than 90% funded, up from 75% at the end of 2016, Alcoa said.

Alcoa Corp. will try to retire its pension liabilities when interest rates go up as it would be cheaper, Oplinger said. Higher discount rates, typically long-term corporate bond yields, result in lower liabilities, reducing the amount of money companies would pay insurers to pay interest on them.

In April, Arconic also transferred approximately $ 1 billion of its US plan obligations and related plan assets for approximately 8,400 participants in MassMutual.

Some companies are now considering paying off these obligations to retirees. BWX technologies Inc.,

A Lynchburg, Virginia-based fuel and nuclear components supplier is considering offering a one-time payment to some vested benefits, said CFO David Black. “We will continue to cut the liability to try to get rid of it,” he said.

Mr. Black intends to review the plan’s remaining permanent employees to see if any more of them could be outsourced to an insurer. BWX was offering lump sums back in 2018 when it transferred $ 240 million in US plan liabilities for 1,300 attendees.

General Electric in June Co.

said it would freeze pension benefits for 2,700 UK participants early next year. In 2019, the conglomerate announced it would freeze its plan for approximately 20,000 U.S. workers and offer pension purchases to 100,000 former employees.

Write to Mark Maurer at [email protected]

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