The best thing that could be done for pension funds in 2015 is something they can't do themselves: increase interest rates.
An interest-rate increase is necessary for the financial health of pension plans because low rates continue to erode the funding levels of the plans, placing huge financial burdens on the sponsors and threatening the security of pensions.
One company conforming with market interest rates is AT&T Inc. According to its most recent 10-K filing, the company in 2013 raised its discount rate for valuing its defined benefit plan liabilities by 80 basis points, and lowered its obligation by $4.5 billion. But that wasn't enough to make up for the effect of 2012, when it lowered its discount rate by 100 basis points and increased its pension obligations by $7 billion.
Companies might have to reduce their discount rates again this year because of the steady decline in yields since the beginning of last year. As of Jan. 16, the 20-year Treasury yield had fallen to 2.17% from 2.41% as of Jan. 2, according to the Department of the Treasury. As of Jan. 2, 2014. the 20-year Treasury yield was 3.68%.
The continued unfavorable outlook on interest rates will likely accelerate pension plan freezes and closings.
A downturn in long-term interest rates near the end of last year has left pension funds in a difficult position. With low rates expected to continue, companies likely will have to dig a little deeper into their pockets to make up any deficits. After years of falling interest rates stemming from the financial crisis and subsequent recession, 2013 brought some hope for pension funds as the economy began to recover, stock markets were buoyed and longterm rates started to rise. Air Canada, for instance, reported in early 2014 that its pension plan was finally in a surplus position, after years of posting deficits as high as $4.2 billion. The Ontario Teachers' Pension Plan began 2014 with its first funding surplus in a decade.
But by the end of last year the hopes of Canadian pension plans were dashed again, as fears about Europe slipping into a recession caused investors to move away from stocks and back into safer vehicles such as bonds, driving yields on long-term bonds lower.
Manuel Monteiro, a partner with global pension consulting firm Mercer, said all of the gains made during the previous year have been reversed, with long-term interest rates once again hovering around 60-year lows. That could spell trouble for some pension plan sponsors, who are usually required to pay back deficits over five years, Monteiro said.
"As long as your company is healthy, even if the pension plan is in deficit, it's probably not a big deal," he said.
Safeway Inc. will contribute an additional $212 million to its largest pension plan in a settlement with the Pension Benefit Guaranty Corp., the agency announced Friday.
Safeway, Pleasanton, Calif., is now owned by an investor group, AB Acquisition LLC, led by private equity and hedge fund manager Cerberus Capital Management. The investor group, which already owned Albertsons Inc., merged the two last month.
PBGC officials used the agency’s early warning program to seek further pension contributions after Cerberus and Albertsons announced the Safeway acquisition in March, because the transaction created $11 billion of secured debt that had priority over the pension plan.
“From the beginning, we knew this sale would put the retirement benefits of nearly 54,000 people at risk, so we moved quickly to engage with Cerberus and Albertsons to get better funding for the plan,” said Sanford Rich, PBGC's chief of negotiations and restructuring, in a statement.
As pension plans incorporate new life-expectancy estimates into their calculations, investors are glimpsing the financial fallout from aging societies.
AT&T Inc. last month absorbed a $7.9 billion non-cash charge from rising pension costs, including retirees’ longer lifespans. At Northrop Grumman Corp., updated mortality estimates boosted its pension obligations by $4.5 billion to $30.5 billion while shareholders in International Business Machines Corp. saw their equity shrink by around $6 billion.
“2014 was a tough year for pension plan sponsors,” said Matt Herrmann, a senior consultant for Towers Watson in St. Louis. “Folks are going to continue to live longer. That means a significant increase in pension liabilities.”
The trigger for corporate pension plans to update their lifespan assumptions was the October release of new mortality tables from the Society of Actuaries in Schaumburg, Illinois. Starting in 2009, society researchers pored over private pension plan data on 220,000 deaths and 10.5 million life-years, said Dale Hall, the society’s managing director for research.
The new estimates, the first update since 2000, were designed to provide more realistic guidance for plan sponsors who have generally done a poor job of keeping pace with the steady improvement in life expectancy in recent decades.
A 65-year-old male now can expect to live 21.6 additional years, two years longer than in the old tables.
Publication of the new tables -- a standard reference for plan sponsors -- began having a financial impact in fourth- quarter earnings statements.
General Motors Co. said on Feb. 4 that the new mortality data added $2.2 billion to its already underfunded pension liabilities.
Along with longer lifespans, pension plans suffered last year from falling interest rates. For most plans, the impact from lower rates, which makes it harder to earn money to pay future benefits, exceeded the price tag associated with updated mortality assumptions.
The Vatican's financial czar, Cardinal George Pell, has raised concern about the fund's long-term health in recent newspaper interviews, saying it is sufficiently funded for the next 10-15 years but needs to be strengthened for future generations.
In a statement, the fund managers said there's "a substantial balance" between resources and commitments for current and future pensioners, with the fund 95 percent covered.
It said it had taken many steps already to address future commitments, including raising the retirement age and pension contributions, and that the fund was expected to top 500 million euros by the end of 2015 after having started out with the equivalent of 5 million euros in 1993.
Pell was tasked last year by Pope Francis to put the Vatican's finances in order after years of mismanagement, waste and scandal. Francis gave him broad powers, and Pell got widespread support for his reform efforts by cardinals who received a closed-door briefing from him last week, the Vatican spokesman said.
But questions have also swirled about the scope of his power amid resistance from the Vatican legal office to his proposals for sweeping oversight and management authority in the statutes for his Secretariat for the Economy.
He also raised eyebrows by boasting in an essay that he had "discovered" hundreds of millions of euros that were "tucked away" in sectional accounts that didn't appear on the Vatican's balance sheets.
Public Advocate Letitia James plans to introduce legislation this week to form an 11-member advisory board to examine creating a pension fund for private-sector workers in New York City.
The board would have a year to present a report to the mayor and other elected officials about the feasibility of a centrally pooled retirement fund and provide recommendations on how such a fund would be structured and managed.
The legislation is to be introduced at Thursday’s City Council meeting. Ms. James, a Brooklyn Democrat who is first in line to succeed the mayor, doesn’t have a vote on the council but has the power to introduce and co-sponsor bills.
“The vast majority of New Yorkers are unprepared for retirement, and if we don’t address this problem we will be seeing an increasing number of seniors in extreme poverty,” Ms. James said.
Ms. James said the purpose of the bill is to study possible solutions for what she called “this looming crisis.” Ms. James said she isn’t wedded to a particular solution, but is looking for the advisory board to provide the city with recommendations.
It wasn’t clear whether the advisory board would focus on creating a traditional defined-benefit pension plan, or a so-called defined-contribution plan such as a 401(k), under which employers and employees can invest for workers’ retirements. Also unanswered is whether any new plan would be voluntary on the part of employers.
The real unintended consequence of that plan is going to be making lots of low-income people Medicaid-ineligible.
TAUNTON — Reed & Barton, the last and oldest silversmith company in a city still known as the Silver City, will cease all operations in Taunton no later than June.
Riddle blamed costly pension liabilities, ranging from $9.6 million to possibly $18 million, for sealing the fate of the historic business — which since 1824 has been operating in Taunton’s Whittenton neighborhood adjacent the Mill River.
“It absolutely killed us — for years it just drained the company of cash,” Riddle said of the pension costs.
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.
Similarly, 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.
Companies “should disclose the impact of mortality to the extent it results in a significant change” in pension obligations, said T. Kirk Crews, an SEC professional accounting fellow, at a December conference.
Thousands of jobs are threatened at major supermarket chain Tesco, the largest retailer in Britain. This follows the decision of new CEO David Lewis to embark on a £500 million cost-cutting drive and store-closure plan, in an effort to confront the decline in profits and marketshare since 2011.
Of Tesco’s 217,000 full-time employees, those that work on the shop floor are paid on average around the minimum wage of £6.50. The remaining 100,000 part-time workers are estimated to save Tesco around 14 percent per employer, or around a £100 million over the year.
These savings are made at the expense of government national insurance receipts which would normally go to state pensions and welfare payments. Tesco avoids paying these contributions by employing workers on a minimum four-hour contract. Although a worker can ask for an increase in hours these are held below the level of earnings of £150 a week after which amount the employer is liable to pay national insurance contributions. It estimated that varied government wage top-up schemes cost the UK taxpayers £90 billion a year.
The result of Tesco not paying employment contributions threatens to leave employees with a limited state pension or no pension at all, guaranteeing a retirement of severe poverty.
Employees at Tesco that maintain a pension will be switched from its defined benefit scheme to a career average plan. Tesco’s defined pension scheme was one of the largest in the UK’s private sector, encompassing all its employees. Today these schemes are regarded as a thing of the past.
In 2004, defined benefit plans were contributed to by 20 percent of FTSE 100 employers (100 largest employers in UK); today there are none.
Most of FairPoint Communication’s unionized workers return to their jobs today after a strike that lasted more than four months.
Last weekend, they ratified a new contract with the company, but unlike past negotiations with FairPoint and its predecessors, the new pact does not represent an improvement over the expired agreement.
The new contract will move future union workers from defined benefit pensions to employee-funded and managed 401K plans. It also freezes past pension accruals for existing employees, cuts in half future accruals, and caps them after 30 years with the company.
In laying out its position last year, FairPoint said its goal was to end defined benefits for union employees. Another point of contention was the use of outside contractors.