Businesses Find the Right Time to Push Pension Bonds Off the Balance Sheets

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CFOs are stepping up efforts to remove pension obligations from corporate balance sheets through annuity purchases and other financial tools, taking advantage of well-funded plans and a respite from last year’s rush to deal with the Covid-19 pandemic.

For years, promoters of single employer pension plans have purchased annuities from an insurer for all or part of their employees with vested benefits, thus reducing the assets and liabilities of a plan and strengthening simultaneously the balance sheet of a company. The size of pension plans often fluctuate in response to market volatility and changes in interest rates, which can create unexpected challenges for CFOs.

Companies spent $ 8.7 billion on annuities in the first half of the year, up nearly 30% from the previous year, according to consulting firm Mercer LLC.

At the start of the pandemic, many companies suspended these transfers as CFOs focused on preserving cash flow, operating remotely and generally dealing with Covid. But plan funding levels have generally improved in recent months, in part due to the strength of the stock market. In addition, a law in March allowed some promoters of single employer plans to reduce the contributions they will have to make in the years to come.

The funded status of defined benefit plans (those that pay fixed sums to retirees for years) sponsored by S&P 1500 companies increased by 14 percentage points to 93% as of July 31, compared to the period of the previous year, according to Mercer data. The estimated overall plan deficit fell 68% to $ 178 billion from the prior year period, in part due to a slight increase in the yield on high-quality corporate bonds.

Aerospace giant Lockheed Martin Corp.

, packaging company Pactiv Evergreen Inc.

and the manufacturer of aluminum parts Arconic Corp.

are among the companies that have entered into annuity agreements in recent months or have considered doing so.

“A lot of plan sponsors say they don’t want to be in the pension business and want to outsource these obligations to a company whose primary jurisdiction is to manage long-term obligations,” said Matt McDaniel, Partner at Mercier.

Others have frozen their plans or taken other tactics, such as allocating more funds to fixed income assets, to reduce risk on their balance sheets, said Beth Ashmore, chief executive of retirement at consulting firm Willis Towers. Watson PLC.

Earlier this month, Lockheed Martin said it had transferred $ 4.9 billion in pension obligations covering around 18,000 U.S. participants to insurer Athene Holding Ltd. in order to mitigate risk. This is the largest annuity transaction to date this year, Mercer said.

In July, Pactiv Evergreen agreed to transfer $ 950 million of plan liabilities — roughly 22% of the plan’s estimated benefit obligations — covering 16,300 members to Lake Forest-based insurer Massachusetts Mutual Life Insurance Co. Pactiv, in Illinois, has sought to reduce risk on its balance sheet as the plan is almost fully funded, CFO and COO Michael Ragen said in an Aug. 5 earnings call.

“The idea is that the pension is increasingly funded to reduce the risk to our business, to reduce the risk to future cash flows,” he said. “So it’s a very good result for us, without prejudice to retirees.

A Lockheed Martin F-35B fighter jet in Fairford, England. The company said earlier this month that it had transferred $ 4.9 billion in pension obligations covering about 18,000 U.S. participants to insurer Athene Holding.


Photo:

peter nicholls / Reuters

Corporate plans have become better funded due to the rise in the stock market. But the lower interest rates mean that the money the plans need to set aside for future payments is also more important.

“For most of the past 20 years, plan sponsors expected interest rates to rise overnight and to stay consistently low, keep going down and cause a lot of pain. Mr. McDaniel said.

Inflation could cause rates to rise significantly and benefit companies with pensions on their books, as it lowers the value of their related liabilities and increases the level of funding for their plans, according to business advisers. The rate hike could also act as an incentive for companies to make gains through liability transfers, the advisers said.

The volume of pension risk transfers to the United States this year is expected to be the largest in years, at between $ 30 billion and $ 40 billion, according to corporate pension advisers. It could set a new record, surpassing the $ 35.9 billion recorded in 2012. Annuities have averaged $ 18.5 billion over the past decade.

William Oplinger, Chief Financial Officer of Alcoa Corp.


Photo:

Alcoa Corp.

In addition to the risk inherent in pension funds, the pension surplus can take a toll on a company’s finances and the stock price. The split of aluminum producer Alcoa Inc. in 2016 into two companies forced the new Alcoa Corp. significant pension liabilities, said CFO William Oplinger. Pittsburgh-based Alcoa has worked to reduce them through annuities, lump sum payments and a $ 500 million contribution in April funded by the proceeds from the sale of debt. Its global pension plans are now more than 90% funded, up from 75% at the end of 2016, Alcoa said.

Alcoa Corp. will seek to convert its pension obligations into an annuity if interest rates rise because it would be cheaper to do so, Oplinger said. Higher discount rates, typically long-term corporate bond yields, cause liabilities to decrease, thereby reducing the amount of money companies would pay insurers to build an annuity.

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

Some companies are now considering repaying these commitments to retirees. BWX Technologies Inc.,

a nuclear fuel and components supplier based in Lynchburg, Va., plans to offer a lump sum payment to certain people with vested benefits, said chief financial officer David Black. “We will continue to reduce the liability to try to get rid of it,” he said.

Mr. Black intends to review the plan’s remaining employees to determine if more of them could be transferred to an insurer. BWX offered lump sums in 2018, when it transferred $ 240 million in US plan liabilities for 1,300 plan members.

In June, General Electric Co.

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

Write to Mark Maurer at [email protected]

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