* AT&T, Verizon, UPS charges total $20 bln
* Actuaries blame low rates, mark-to-market accounting
* Some companies still have to add funds, too
By Ben Berkowitz
Jan 31 Pension charges wiped out more than $20
billion in fourth-quarter earnings at major American companies,
as persistently low interest rates leave some of those with the
largest retiree burdens no choice but to assume they need more
money now to cover liabilities later.
Actuaries warn there is little chance for improvement on the
horizon for defined benefit pension programs, as rates linger at
historically low levels and the Federal Reserve shows no
inclination to raise them. The only hope, they say, is for rates
to turn around - though when, no one really knows.
Just between AT&T Inc (T.N) ($10 billion), Verizon
Communications (VZ.N) ($7 billion) and UPS (UPS.N) ($3 billion),
pension accounting has led to massive noncash charges in the
last few weeks, and those three are not alone.
It is possible there will be even more before the reporting
season ends. Employment lawyers say about 37 percent of people
with retirement benefits still have a defined benefit plan or a
mix of defined benefits and a 401(k), with little distinction
The problem is an interest rate called the discount rate, a
number that companies offering plans use to calculate the
present value of their future obligations to retirees - how much
they need today, in other words, to pay pensioners tomorrow.
Many large plan sponsors have chosen some version of
mark-to-market accounting for their pension plans, which means
they need to adjust their discount rate periodically (usually
yearly) to market conditions.
When market forces dictate that they assume a lower discount
rate, it can create a huge actuarial loss.
"The promises these companies have to their employees hasn't
fundamentally changed at all," said Kevin Wagner, a senior
consulting actuary at Towers Watson. "This is really driven by
two things: one is that interest rates have just dropped, that's
all, and secondly, different companies have made different
decisions on how they want to account for pension plans."
Wagner and others said that choice comes down largely to how
a company wants to handle its pension risk - take the hits (or
someday, the rewards) immediately or stretch them out over time?
In AT&T's case, for example, lowering its discount rate by
100 basis points led to a $12 billion loss, offset only in part
by rising asset values. In UPS's case, year-end discount rates
fell a full 120 basis points.
"Is it something that with just a moderate increase in the
economy and interest rates would reverse and actually begin to
be a positive on paper? Yes. So we take it seriously but also
realize that it is an accounting definition and one that could
swing either way,” UPS Chief Financial Officer Kurt Kuehn said
in a telephone interview.
AT&T and Verizon are two of the many companies that have
adopted mark-to-market pension accounting, which experts have
said can be beneficial because it removes the drag of pension
losses from future results. Someday, when rates rise, it could
also create one-time, pension-driven increases in earnings.
In the meantime, though, it is not helping much. The
well-regarded pension consultancy Milliman Inc estimated earlier
this month that the country's 100 largest corporate defined
benefit pension plans had a deficit of $412 billion at the end
of 2012, up 22 percent from a year earlier.
In many cases, strong performance of assets was not enough
to offset rising liabilities.
As the firm noted, pension fund returns have exceeded
expectations in three of the last four years, but lower discount
rates meant the plans' funded status worsened anyway.
"People may be getting tired of hearing me saying it but
interest rates have been the story for the last four years and
that's not going to change in 2013," John Ehrhardt, a principal
and consulting actuary at Milliman, said in a companion to the
By Milliman's estimate, the pension funding deficit would
decrease nearly 40 percent by the end of 2014 if only discount
rates would stop falling and plans would meet their expected
rate of return on their assets.
But that is not the case. Not only are discount rates coming
down, plan sponsors are lowering their expected rates of return
too. AT&T, for example, lowered its expected return 50 basis
points, even after exceeding the old threshold for 2012.
Corporate pension funding is always a complicated issue,
made even more so now by, of all things, a highway
Commonly known by its shorthand name, the MAP-21 Act became
law last July. It included a provision that lets companies use
an average of interest rates over the prior 25 years when
determining how much they have to contribute to their plans to
meet funding requirements. (The provision found its way into the
bill as a revenue-raising mechanism to offset highway spending.)
That effectively lets companies contribute less into the
plans, saving them money. In other words, for plan sponsors'
purposes, rates went up even as in reality they were going down.
"It's a very awkward relief. I'm not quite sure how anyone
came up with this, frankly; you couldn't make it up," said Jon
Barry, a partner at Mercer. "In 2012 and definitely in 2013 too,
all things being equal, funding is quite a bit lower under this
Not all companies will take advantage of it. Some actuaries
say companies that are trying to actively reduce risks in their
pensions are unlikely to use it at all.
"You do have plan sponsors in more cash-strapped industries
or more cash-strapped companies who will take advantage of it,"
said Margaret McDonald, a senior vice president and senior
actuary at Prudential Financial.
UPS said on Thursday it will face $225 million in pension
costs this year, nearly 5 percent of its forecast earnings.
Without knowing what treatment the company has chosen, multiple
actuaries said it was entirely possible that contribution would
be larger but for MAP-21.
Analysts say that either way, those contribution figures are
ultimately more important than the discount-rate charges, in
that they represent actual cash coming off the books.
“It’s important to look at what’s an economic result and not
just a reported number based on new mark-to-market rules,” said
Keith Schoonmaker, equity analyst at Morningstar.
(Additional reporting by Scott Malone in Boston and Jilian
Mincer in New York; Editing by Steve Orlofsky)
((Ben.Berkowitz@thomsonreuters.com; +1-617-856-4334; Reuters
Keywords: US CORPORATE/PENSIONS
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