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Corporate Pensions Look to Boost Plan Contributions Ahead of Deadline

Corporations are moving quickly to top up their pension funds, while also setting the stage to shift their retiree obligations to insurance companies.

It’s rare to see public companies race to make contributions to their pension plans, since these investments won’t boost their revenues or profits. But a September 14th deadline to deduct pension contributions at a more favorable rate is pushing U.S. companies to seriously consider topping up their plans. 

After mid-September, under the Tax Cuts and Jobs Act implemented earlier this year, corporations will only be able to deduct pension contributions at the new 21 percent rate, as opposed to the former corporate tax rate of 35 percent. 

A new study conducted by CFO Research for Prudential Financial, which offers so-called pension risk transfers, found that 74 percent of 127 senior finance executives say they are “very likely to make a substantial DB plan contribution” to take advantage of the 2017 tax rate of 35 percent. The eighth-annual survey also found that 64 percent of respondents will use savings from lower tax rates to increase the financial health of their pensions. 

Other forces are also pushing corporate treasurers to fully fund their plans. Interest rates are rising, pushing down the price of an annuity from an insurance company; many pension plans’ assets are at highs given the rise of markets around the world; and the Pension Benefit Guaranty Corp., which insures pension benefits, is raising premiums. 

“Even though capital markets have been cooperating in terms of rates rising modestly and strong equity performance, the ability to earn your way to full funding is extremely remote,” says Scott Kaplan, head of Prudential’s pension risk transfer business. “Contributions will be needed. And now’s the right time.” 

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Once a plan is fully funded, companies can eliminate the risks of providing guaranteed retirement benefits to workers altogether, either by transferring their liabilities to insurance companies or implementing an investment strategy to lock down risk. 

Some 62 percent of respondents to the CFO/Prudential survey say they “agree” that they are “very likely to execute a full or partial pension risk transfer to an insurance company.” 

Kaplan says plan contributions can also help companies save on PBGC’s variable rate premiums, which are being increased in 2019. Variable rates have been increased every year since 2013. 

The PBGC premiums are based on the level of a plan’s underfunding. A plan that is only 70 percent funded pays more than one that is at 90 percent, for example. Kaplan advises that companies are even better off issuing debt at today’s current low rates than they are paying higher variable rate premiums.

About one quarter of survey respondents said they would use money repatriated from outside the U.S. to improve funding levels of their pensions. Under the new tax law, U.S.-based multinationals can repatriate foreign earnings at lower rates. The law also provides for a one-time repatriation of cash at 15.5 percent and non-liquid holdings at 8 percent. 

A number of big companies have made or announced that they will make contributions into their defined benefit plans, including Caterpillar, Deere, Raytheon, Northrop Grumman, Lockheed Martin, and United Parcel Service.

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