The CFOs of big U.S. companies with traditional, single-sponsor pension plans are taking advantage of the strong stock market, among other things, to lessen the risk the massive obligations the plans pose by transferring a portion of their liabilities to insurers, The Wall Street Journal reported. 

Not a lot of companies today have the kind of defined-benefit plans that were popular decades ago. Only roughly 20,000 companies do, according to Mercer LLC, and of these, only a handful still offer the plans to new hires. Many of the companies, although obligated to pay the benefits promised to existing participants, now offer 401(k) plans for new hires instead, essentially offering employees an employer-contributed benefit that transfers the long-term risk to employees.

But for those that still have the plans on the books — companies like GE, GM, Ford, Boeing and IBM — the unfunded obligations can be huge, in the tens of billions of dollars. What’s more, since around 2006, they’ve had to show the funding status of these long-term obligations on their balance sheet every year, creating a short-term financial impact that can reverberate down to the shareholder level.

Tough climate

Last year was particularly rough on the plans; to preserve cash against the uncertain economic environment, companies reduced the money they set aside to fund pension liabilities, increasing the gap between their long-term obligations and the money they have to pay out benefits. The federal government helped enable this as part of Covid relief by giving companies 15 years rather than seven to pay off plan deficits.

For the S&P 1500, the combined funded level of the plans so far this year is 93%, according to Mercer, which means the gap between what companies are obligated to pay beneficiaries and what they have available to make the payments is 7%, or almost $180 billion. 

The landscape has improved this year, thanks to the re-opened economy and strong equity gains in the stock market. As a result, companies have been making big payments to close their fund deficits, but they’ve been executing other tactics as well, like buyouts, to reduce their long-term obligations, the Journal reported. In a buyout, companies offer pensioners a lump-sum payment in exchange for removing them from the plan.  

Annuitization 

In one of the key moves, called annuitization, companies are transferring a portion of their obligations to insurers in exchange for premium payments. It’s not a new tactic; they’ve been doing it for at least a decade, but they’re picking up the pace.    

In the biggest of these moves this year, Lockheed Martin transferred $4.9 billion in pension obligations, covering about 18,000 people, to Athene Holding Ltd. 

“Plan sponsors are saying they don’t want to be in the pensions business, and they want to turn these liabilities over to a company whose core competency is to manage long-term liabilities,” Mercer Partner Matt McDaniel told the Journal.

In another annuitization, Pactiv Evergreen, a food and beverage packaging company, transferred $950 million in plan liabilities, or about 22% of its obligation, to Massachusetts Mutual Life. 

“The whole idea of this is ... to reduce the risk to our business, to reduce the risk to future cash flows,” Pactiv’s CFO-COO Michael Ragen told the Journal. “So it’s a really good result for us with no detriment to pensioners.”

Arconic, a metals engineering spinoff from aluminum giant Alcoa, transferred about $1 billion in obligations to MassMutual.

In all, companies spent $8.7 billion on annuitizations in the first half of the year, up nearly 30% from the prior-year period, according to Mercer data reported by the Journal. 

To the extent inflation picks up and interest rates follow suit, more companies can be expected to annuitize a portion of their obligations; although higher interest rates help bring down pension fund liability, by lowering the value of the plan’s liabilities and raising their funding level, these conditions give CFOs an opportunity to lock in these gains by transferring them to insurers, the Journal reported. 

“We’ll continue to chip away at the liability to try to get rid of it,” said David Black, CFO of BWX Technologies, a supplier of fuel components.

His company hasn’t executed an annuitization yet this year, but it’s looking at spinning off a portion of its vested employees to an insurer.