(Bloomberg Businessweek) -- The largest pension plans held by S&P 500 companies face a $348 billion funding gap. As a result, they’re paying higher annual fees to the U.S. Pension Benefit Guaranty Corp., the government agency that backstops plans. “There’s increased awareness that an underfunded plan imposes risk on employees, it imposes risk on shareholders, and it’s getting more expensive,” says Olivia Mitchell, a professor at the University of Pennsylvania’s Wharton School and executive director of the Pension Research Council.
The fees, called variable-rate premiums, are set by Congress and meant to encourage companies to set aside more money in their pension funds. They’ve more than tripled in four years for companies including General Electric Co. and Boeing Co., according to data obtained by Bloomberg News through a Freedom of Information Act request.
GE’s fees surged more than sixfold, to about $238 million, in 2017 from 2012, according to the PBGC data (that doesn’t include the agency’s flat-rate participation fees). Boeing’s bill was $151.7 million, about four times what it paid in 2014. GE and Boeing had the largest pension shortfalls among S&P 500 companies. GE, whose pension fund is short by about $31 billion, said in November it would borrow $6 billion to fund its plan. After Boeing’s fund fell short by about $20 billion at the end of 2016, the company said in July that it would add $3.5 billion of its shares to a scheduled $500 million pension contribution.
Employers have found it “more and more difficult to offer a pension,” says Dennis Simmons, executive director of the Committee on Investment of Employee Benefit Assets, an industry group. “Part of that is because of rising PBGC fees and more difficult regulations.” Booms and busts in the stock market have made it harder for companies to keep up with their contributions. The pensions have become “big, and they’ve been quite volatile since 2000, when we’ve seen some serious ups and downs in the market,” says Peggy McDonald, a senior vice president who works on pension risk transfers at Prudential Financial Inc.
The rising fees and pending Republican tax overhaul legislation are encouraging some companies to build up their funds. Because pension contributions are tax-deductible, it’s more valuable to contribute to a pension while tax rates are higher.
Employers with the 100 largest defined benefit plans added a combined $43 billion to plans last year, compared with just $31 billion the year before, according to Milliman, an actuarial company. Most are eager to get out of the pension business, preferring 401(k) plans, where the employee bears the risk of falling short at retirement. More are offloading their pension plans, paying insurance companies such as Prudential or MetLife Inc. to take them on instead. Such transactions could exceed $19 billion this year, according to industry group Limra. Only about two dozen companies in the S&P 500 have overfunded pensions. Nine of them are banks.
Offloading risk isn’t on the table for every company. Insurers don’t take on obligations from underfunded plans, McDonald says. That means companies need to better fund their plans, limiting those variable-rate premiums, before they can transfer the obligations. “In the short term, these PBGC premiums are having a really significant impact,” she says. “This is in a way an expense-management exercise.”
To contact the authors of this story: Katherine Chiglinsky in New York at kchiglinsky@bloomberg.net, Brandon Kochkodin in New York at bkochkodin@bloomberg.net.
To contact the editor responsible for this story: Michael Scott Moore at moore.michaelscott@googlemail.com, Dimitra Kessenides
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