Under the new Covid 19 support package, financial services executives will be given more time to address their firms’ pension deficits and more flexibility in how they spend the money they have invested in pensions.
Market turmoil and near-zero interest rates have made it difficult to manage companies’ pension liabilities, especially for single-employer plans. Low interest rates contribute to the growth of liabilities by increasing the amount that companies must set aside for pension obligations.
Single-employer plans often promise to pay fixed amounts to retirees, sometimes for several decades, like other defined benefit plans. According to consulting firm Mercer LLC, more than 20,000 U.S. companies offer these single-beneficiary plans.
Many of these largely underfunded schemes have benefited from equity market growth in recent months. The coverage ratio of plans of individual employers sponsored by S&P 500 companies increased by about 4.7 percentage points year-over-year to 91.5% at the end of 2020, according to the consulting firm.
The automaton said. Since then, the funding level has increased to 95.3% as of September 28. February has increased. The combined pension deficit for S&P 500 companies stood at $102.1 billion on February 28, down 72.8 percent from a year earlier, according to Aon.
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However, as interest rates are expected to remain low for some time, companies need long-term support to continue to contribute to their plans and cope with possible future market fluctuations or cash shortages, advisers said.
The $1.9 trillion bailout package signed by President Biden earlier this month allows sponsors of single-employer group plans to withhold funds and delay payment of any deficits in their plans for 15 years, instead of the current seven years. It also allocated about $86 billion to combat multi-employer group pensions, which are jointly administered by unions and corporations.
The legislation creates a more predictable and favorable framework for measuring the liabilities that ultimately determine funding obligations, said Jonathan Price, senior vice president of Segal Group Inc. a consulting firm specializing in employee benefits.
Companies can use at least a corporate bond yield of around 5% to value their pension liabilities. Before the law, there was no such minimum. A minimum rate higher than the current market rate is expected to reduce the short-term contributions that companies must pay to meet their plans.
If you’re a CFO, it’s always good to not have an absolute obligation to contribute to a retirement plan in any given year, says Mercer partner Matt McDaniel.
The bill also expands the existing option by allowing companies to renegotiate their financing obligations to free up cash. The U.S. government has provided this flexibility for the past decade, most recently in 2015. This option expired at the beginning of this year.
Under the Covid 19 package, companies can reallocate funds for pension contributions in 2019 and 2020, provided they make those payments later. By reducing future pension costs, cash can be used to offset salary costs and stabilize the company in the event of a pandemic. This relief provides no benefit to workers other than allowing companies to spend money on hiring or avoiding layoffs.
Companies can also make these changes as early as next year. Most provisions of the new law expire in 2026.
The option is designed to help CFOs and treasurers who struggle to make contributions to one employer’s plans while investing in their business, Price said.
Airlines and hotel operators are among those expected to benefit most from the pension measures, as the hardest hit companies seek to better manage their cash flow.
John Howard, CFO of United Natural Foods.
United Natural Foods Inc.
United Natural Foods Inc,
a Providence, R.I.-based wholesale department store is considering changing its pension contributions as a result of the legislation, but does not expect a significant benefit, the CFO said
Said. We’re looking at it and I think it will bring some relief, he said.
The company’s single-benefit plan covers about 27,000 workers, but is closed to new entrants. United Natural Foods said it contributed $16.1 million to the plan for the fiscal year that ended last August and has no obligation to contribute for the current year. The current funding level is about 95 percent, a company spokesman said.
Some companies will not benefit from the new flexibility offered to them, particularly those that manage their schemes with a single employer. These companies want to speed up their contributions, not slow them down, they said.
Partner of the consulting firm October Tree Consulting LLC.
About 25% of the roughly 22,520 single-employer plans were closed to new enrollees or accrual in 2017, the most recent data available, according to state pension insurer Pension Benefit Guaranty Corp.
A smaller contribution today means you have a large gap between your assets and what is needed to complete the plan, Lowell said.
When the coronavirus hit industry, commerce, and society in March 2020, the U.S. economy came to a standstill. Top leaders look back on the tough decisions they made to weather the storm. Photo illustration: Adele Morgan/Wall Street Journal
Please email Mark Maurer at [email protected].
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