Pension contributions from public firms to increase in 2012

Publicly owned U.S. corporations plan to increase pension contributions significantly in 2012.

Eleven companies announced a combined $10.8 billion in contributions in their fourth-quarter earnings statements in the last week of January. Five of them announced contributions in 2012 of $1 billion or more each to their pension plans.

The five companies are:

• Ford Motor Co., Dearborn, Mich., which plans to contribute about $3.5 billion in cash to its global pension plans, about $2 billion of which will be in discretionary contributions to its U.S. plans. Ford had U.S. defined benefit plan assets of $39.1 billion as of Sept. 30, according data from Pensions & Investments, a sister publication of Business Insurance. The company's non-U.S. defined benefit plan assets totaled $18.6 billion as of Dec. 31, 2010, according to the company's latest 10-K.

• Boeing Co., Chicago, which plans to make $1.5 billion in discretionary contributions to its pension plans. The company had $49.3 billion in U.S. defined benefit plan assets as of Sept. 30.

• Verizon Communications Inc., Basking Ridge, N.J., which expects to contribute up to $1.26 billion to its $23.7 billion U.S. pension plan.

• Raytheon Corp., Waltham, Mass., which plans to contribute $1.2 billion in 2012, $1.4 billion in 2013 and $1.6 billion in 2014 to its $13.9 billion U.S. pension plan.

• Honeywell International Inc., Morristown, N.J., which is making an $800 million to $1 billion contribution to its $2.7 billion U.S. pension plan.

Bob Collie, chief research strategist, Americas institutional, at Russell Investments, said by looking at the total contributions of the 16 corporate plans in Russell's “$20 Billion Club”—U.S. corporations with worldwide defined benefit liabilities of more than $20 billion—one can see a growth pattern that is continuing into 2012.

“Those 16 plans account for about 40% of the total assets and the total liabilities (of all corporate plans). The combined contribution in 2008 was $8.25 billion, and in 2009 it went up to $21 billion. In 2010 and 2011, that's gone up to $25 (billion) to $30 billion,” said Mr. Collie.

The timing of these large contributions also can be attributed to record cash levels, according to Michael Schlachter, Denver-based managing director at Wilshire Associates Inc. “Cash is earning zero, their pension plans are earning 7% or 8% or whatever,” said Mr. Schlachter. “With that cash you can hire people, you can invest, you can build facilities or you can put it to work like that. Why not prefund the heck out of it right now?”

One reason companies can make these outsize contributions is that generally cash on corporate balance sheets is at an all-time high, Mr. Schlachter said. “Companies are earning virtually nothing” on their cash because it is conservatively invested in short-term instruments. Contributing to pension plans is “a better place to put cash to work than sitting there earning zero (return),” Mr. Schlachter said.

Ford, for example, had $22.9 billion in cash and marketable securities as of Dec. 31, up from $20.5 billion a year earlier, according to a U.S. Securities and Exchange Commission filing Jan. 27.

“A lot of companies are sitting on record amounts of cash and there isn't enough confidence to reinvest in the business,” said Kevin McLaughlin, New York-based senior investment consultant at Mercer L.L.C.

The rise in contributions is no surprise, said Alan Glickstein, Dallas-based senior retirement consultant at Towers Watson & Co. Pension funding rules set by the Pension Protection Act of 2006, combined with the financial crisis two years later that resulted in historically low interest rates, has built what Mr. Glickstein calls the “wall of contributions.”

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“It's definitely starting to hit in 2012 and will probably last a couple years, at least,” said Mr. Glickstein. “As we adapt to this new pension funding law and the unfortunate timing of the economic downturn—and one of the reasons the interest rates are so low is the government holding (rates) down—some plan sponsors are having trouble with that.”

At the end of 2011, the unfunded liability of Ford's global pension plans was $15.4 billion, with its U.S. plans underfunded by $9.4 billion. Its discount rate dropped to 4.64% from 5.24% the previous year.

Boeing's discount rate dropped to 4.4% from 5.3% a year earlier, and the plans' funding ratio fell to 75% from 83% a year earlier.

“The deficits at the end of 2011 are as significant as the deficits at the end of 2009,” said Mr. McLaughlin. “It's a timing decision. Should I fund today or fund in the future? They'd rather pay more today...than spread these contributions over the next couple of years,” said Mr. McLaughlin.

Mr. Collie said Russell is suggesting to clients that they might want to rethink the common practice of waiting until September to make their contributions.

By waiting until September, the last month that calendar-year plans are able to make contributions count toward the funded status of the current year's valuation, companies are able to control their cash for as long as possible.

“Because the numbers are bigger, if they wait until September there's the potential of a very crowded trade going on,” said Mr. Collie. Such a concentration of large contributions in September might affect prices of long corporate bonds, which are in relatively short supply.

Rob Kozlowski is a reporter for Pensions & Investments, a sister publication of Business Insurance. P&I Editorial Page Editor Barry B. Burr contributed to this story.