February 14, 2018 / 12:03 PM / 10 months ago

RPT-ANALYSIS-Rising U.S. bond yields offer relief to corporate America's pension plans

    By Kate Duguid
    NEW YORK, Feb 14 (Reuters) - The swift rise in U.S. bond
yields in February may be whipsawing some stock market
portfolios but it may bring relief to corporate America's
largest pension plans.  
    For pension funds, rising interest rates can generate more
investment income to cover their obligations to pay pensioners. 
    The prolonged low-rate, low-volatility environment since the
2008 financial crisis posed a challenge for pension fund
managers. Not only were returns on bonds low, but the market
value of their liabilities was rising, reducing the so-called
funding ratio of pension funds.
    Rising bond yields can be good for pension plans because it
can lower the required annual cash infusions while still meeting
their liabilities, said Michael Schlachter, a partner at pension
fund advisor Mercer Investment Consulting in Boulder, Colorado. 
    The estimated aggregate funding status of pension plans
sponsored by S&P 1500 index companies increased by 3 percent in
January to 87 percent at the end of the month, as a result of
both an increase in discount rates on liabilities, tied to bond
yields, and a rise in equity markets to a new record, according
to Mercer.
    Last week's volatile stock markets worldwide were
accompanied by surging bond yields though which worked in favor
of pension funds.
    Across America's largest 1,000 companies, 491 offer
defined-benefit plans which pay a fixed pension, and these plans
have most of their assets in fixed income, followed by equities,
then other assets like private equity and cash, according to
Willis Towers Watson.
    As annual reports are published throughout February, the
average funded status of the plans, or the gap between what
corporations owe for their pension plans versus what they have
set aside for the obligation, will likely show the first
year-over-year increase in four years. 
    "Continued rises in interest rates, equity values, and
contributions could further augment funded ratios in 2018," said
Michael Moran, chief pension strategist at Goldman Sachs Asset
Management in New York. 
    Rising bond yields will free up companies to contribute less
to pension plans, which are helped most by the rise in yields of
U.S. Treasury debt with a long maturity. Last year's
"flattening" in the yield curve, in which long-dated yields fell
 faster than short-term yields, had hurt some pension plans. 
    Last week, U.S. defense company Lockheed Martin Corporation
        reported that its pension fund for employees nearly
tripled its return on assets in 2017 from the year prior, but 
the plan's funded status decreased over that same period from
69.7 percent to 68 percent. 
    Also last week, $62.7 billion snack conglomerate Mondelez
International          reported that its pension plan, which was
overfunded in 2016 at 100.4 percent, was in 2017 down to 97.4
percent. Greif Inc        , an industrial packaging firm, said
the funded status for its U.S. pensions declined from 70.7
percent to 69.3 percent.
    All told, it's not just the swift rise in bond yields that
is projected to help corporate pension funds. 
    Spurred by President Donald Trump’s tax overhaul, corporate
pension plan sponsors across the United States upped their
contributions hoping to take advantage of the old 35 percent tax
rate, which is deductible from a tax bill, before they are
forced to use the 21 percent rate in September. 
    United Parcel Service         increased its pension
contribution by $7.3 billion in 2017 over an expected $2.3
billion at the start of the year. General Motors       , which
manages the largest corporate pension plan in the United States
contributed $3 billion last year. 
    In 2017, Boeing        added $3.5 billion, Delta        
added $3.2 billion, and Verizon        added $3.4 billion in
addition to the $600 million it had already pledged. Lockheed
Martin plans to add $5 billion in 2018.     

 (Reporting by Kate Duguid; Editing by Jennifer Ablan and Megan
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