Full disclosure, I own some shares in one of these companies and have previously invested in others mentioned in the article. No pump & dump post here.
Funny, Bush was supposed to be the free-market business president and nearly had a global meltdown while the Obama administration can boast of making these blue-chip firm's pension funds solid again.
Money talks and y'all know the other part.
October 20, 2013 5:17 am
US corporate defined benefit pensions gain some lift
By Ellen Kelleher
Retailer JC Penney offered lump-sum payments to former employees with vested stakes in its DB scheme
Funding levels of defined benefit pension schemes at
IBM,
General Motors,
Ford,
Boeing and other blue-chip companies in the US have experienced a welcome improvement in the past year, prompting some schemes to start taking risk off the table.
Funding ratios for the 100 largest DB pension plans at US companies, which boast close to $1.4tn in combined assets, rose to an eye-catching 91.4 per cent last month, having climbed from just 74 per cent in September 2012, according to Milliman, the actuarial firm. The improvement was largely due to shifting projections for interest rates, changes in strategy and stronger investment returns.
It marks the highest funding ratio for US DB schemes since the collapse of Lehman Brothers in October 2008.
This process may have further to run. Actuaries at Milliman forecast that pension managers at the aforementioned 100 US companies will see their funding ratios rise to an impressive 98.1 per cent by the close of next year. Their deficits should drop from $132bn at the end of September to as little as $29bn over the same period, Milliman predicts.
John Ehrhardt, a principal and consulting actuary at Milliman, explains: “As interest rates come up, it will reduce the cost of maintaining these plans.”
He adds: “If the
Federal Reserve takes its foot off the floor on interest rates, rates could go up significantly.
“Generally, rising interest rates are good news for pension fund schemes because liabilities will go down as interest rates go up. But the more longer-duration bonds pension funds hold, the less of that good news they’ll see. That’s the big story for 2014.”
This burst of rosy news arrives at a time when US DB schemes are largely closed to new members as companies shift the burden of pension planning to employees by offering
401(k) plans – which are roughly equivalent to defined contribution programmes in Europe – in lieu of DB schemes.
However, there are a number of corporate stalwarts in the US whose DB plans are still open to further accrual by existing members, such as Boeing (which has a pension funding ratio of roughly 74 per cent),
General Electric (70.6 per cent),
AT&T (76.5 per cent),
Lockheed Martin (67.2 per cent),
ExxonMobil (63.4 per cent),
UPS (78.1 per cent),
Pfizer (71.8 per cent),
Johnson & Johnson (80.3 per cent) and
Federal Express (78.1 per cent).
Mr Ehrhardt notes that fund managers are changing their investment strategies as funding ratios improve for DB schemes. For example, to immunise the asset side of their balance sheet from further interest rate rises, more are investing in low-volatility equities or using derivatives as a hedging tool to remove some of the interest rate risk.
He also predicts that if market interest rates continue to rise, managers of “frozen” DB schemes, which are in run-off mode, will take advantage by offloading liabilities. “They’re telling me they want to get the cash in, wait for interest rates to rise and then dump the liabilities.”
Ways to offload liabilities might include making lump-sum payments to former employees enrolled in DB schemes or purchasing annuities for them.
Last year, the retailers Sears and
JC Penney, as well as Pepsi, the beverage company, offered lump-sum payments to former employees with vested stakes in their DB schemes. Carmaker General Motors and Verizon, the telecommunications company, purchased annuities for their retirees. By doing so, GM, Verizon and Sears ditched more than 20 per cent of their pension liabilities, while Pepsi and JC Penney managed to rid themselves of between 5 and 10 per cent, according to analysis by actuaries.
Managers of DB schemes are also segmenting their assets into two categories: return-seeking and
liability hedging, according to Russell Investments, the investment manager.
On the return-seeking side, they are taking risk off the table by moving into high-yield debt, bank loans and emerging market debt, believing these asset classes can produce “equity-like returns with lower volatility than stocks”, says Rachel Carroll, a senior analyst at the firm.
A number of pension plans are then implementing a so-called liability-responsive asset allocation schedule. This moves assets from their return-seeking portfolio into their liability hedging portfolio as their funding status improves, Ms Carroll says.
A first trigger point might come when a scheme’s funding ratio reaches 70-80 per cent. In such a case, about 5 per cent of assets might be moved into liability-hedging strategies.
“Pension plans, especially those plans that are frozen, see their risk-reward trade-off change as their funded status increases,” says Ms Carroll.
“An automated schedule is set up to transfer assets in conjunction with a rising funded status.”
