General Electric just announced one of the largest pension contributions on record – a $6 billion1, voluntary debt-funded contribution to be paid in 2018. GE’s peers from the $20 billion club (our name for the 19 U.S. listed corporations with the largest pension liabilities) have been following a similar game plan in 2017. In this update, we review their activity in 2017 so far.
The big story this year: discretionary contributions
Some years, no single aspect dominates pension-related activity at these corporations, and our update ranges far and wide. This is not such a year. In this update, we will focus almost exclusively on the question of discretionary contributions; these are on course to reach record levels, and the decisions to contribute have, in many cases, been made fairly recently.
The pattern of contributions over recent years has been erratic. In the wake of the financial crisis, the 19 corporations’ pension plan contributions jumped sharply, surpassing $30bn by 2012, which was more than 2½ times what it had been in 2008. Funding relief (most notably, although not exclusively, MAP-212) reversed that trend, however: in 2015, combined contributions were just $13bn, which did not even cover the cost of the accrual of new benefits that year. 2016’s total was higher: $18.6bn, of which $11.8bn represented required contributions and $6.8bn was discretionary.
That brings us to 2017.
In their 2016 annual reports, the corporations indicated $13bn of required contributions for 2017, and a handful announced specific plans to make discretionary contributions (adding up to $2bn), while a few others indicated they’d decide later whether to do so or not.
Since then, an additional $13bn of discretionary contributions have been made in 2017, bringing total discretionary contributions to $15bn and counting:
- In March, FedEx announced that “we have made contributions totaling $2 billion to our tax qualified U.S. domestic pension plans, which is $1.5 billion more than what is required, partially funded by the $1.2 billion debt offering we issued in January.”3
- In April, Verizon announced $3.4 billion of discretionary funding: “The discretionary pension contributions are net present value positive on an [after] tax basis given the reduction in our variable rate PBGC premiums and the expected net return on plan assets. As a result of these contributions, our mandatory pension funding through 2020 is expected to be minimal.”4 The contribution was funded by a debt offering in the first quarter.
- In May 2017, DuPont made a $2.7 billion discretionary contribution to their principal U.S. plan, primarily funded by a $2 billion debt offering the same month.
- In July, Boeing announced “action to further de-risk the company by accelerating $3.5 billion of pension funding, which we expect will eliminate nearly all future mandatory pension funding through 2021.”5 This contribution was to be made using Boeing shares.
- In September, United Technologies announced a voluntary contribution of $1.9 billion.6
So contributions look set to be at least $28bn in 2017. And if anyone else decides to make contributions before the end of the year, the total could exceed 2012’s historic high.
Scheduled contributions for 2018 are already off to great start with General Electric planning to issue debt to voluntarily fund $6bn to its pension plans – this coming from a sponsor that has generally only paid what was required, and has only once contributed more than $1bn in recent memory. That’s a dramatic shift in funding policy.
The biggest driver for this trend has been skyrocketing PBGC premiums, but tax effects also serve to accentuate the benefits, as confirmed in the corporate statements above. The variable rate premium to the PBGC is 3.4% of the marked-to-market, vested plan shortfall in 2017. This will increase to 3.8% in 2018 and at least 4.2% in 2019 (for context, this rate was below 1% just five years ago). At those levels, many sponsors are concluding that it simply doesn’t make sense to allow a significant deficit to persist in the plan.
Tax reform is a wild card
Discretionary contribution activity may not be done yet. One variable that is being closely watched is tax reform. If the corporate tax rate looks set to fall in future years, then there’d be a big advantage to contributing in 2017, hence obtaining a deduction at a higher rate, rather than deferring contributions.
Northrop Grumman CFO Kenneth Bedingfield, for example, has remarked that “We continue to monitor progress on tax reform, and if it makes economic sense, we would consider making a voluntary contribution to the plans this year,” and his counterpart at Lockheed Martin, Bruce Tanner, similarly said that “If in fact tax reform is initiated, we will clearly look at potentially accelerating our pension contributions, even if it requires taking out some debt to do so.” We expect that many others would re-assess their contribution policy in the event of significant progress on tax reform.
Even setting that possibility to one side, however, it’s clear that the big story from the $20bn club so far in 2017 (and perhaps continuing into 2018) is one of accelerated funding through discretionary contributions. Other notable activity includes a voluntary lump sum program (FedEx) and the announcement of a switch to a 401(k) plan from 2023 (UPS non-union plan) and the merger of two club members (Dow Chemical and DuPont). We’ll discuss those and any other developments that occur in these corporations’ plans in more depth in our next full update in March 2018.
2 The Moving Ahead for Progress in the 21st Century Act of 2012.
3 Q3 earnings call, March 21, 2017. All earnings call quotes cited are from www.seekingalpha.com
3 Q1 earnings call, April 20, 2017.
3 Q2 earnings call, July 26, 2017.
3 Described in Q3 earnings call, October 24, 2017.