Pension Liabilities Among Major Industrial Companies Jump on Low U.S. Interest Rates

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Several large companies like General Electric (NYSE:GE), Boeing (NYSE:BA) and 3M (NYSE:MMM) are getting hurt by low interest rates as their pension contributions to the employee pension benefit programs have increased due to historically low interest rates which are driving up the liabilities associated with pension plans. These companies along with other U.S. employers are expected to make contributions of over $100B in 2012 to pension funds, an increase of 67% over the last two years. The low interest rates have significantly increased the liabilities of companies and consequently, they have to commit more assets to cover those liabilities. Over the next four years, it is expected that over $400B will be committed to 100 largest pension funds to ensure that they are adequately funded. The current assets in January cover less than three fourth of the projected layouts according to consultant Milliman Inc.

The Federal government passed the Pension Protection Act in 2006 giving employers seven years to fully fund their pension plans. [1] This act came into effect from 2008 and forces the companies to use a specified market based rate of return to compute liabilities instead of the company estimates. This rate is calculated by projecting the future cash flows and discounting it to the present using a interest rate which correlates to the basket of corporate bonds. This has resulted in a ballooning of liabilities as the discount rate, which have been maintained by Fed at 0.75% since January shows no sign of increase and is expected to stay at current levels till 2014.

The impact of this is great for older companies which are still using the defined benefit plans. Most of the younger companies have migrated to 401(k) savings account scheme.

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Let us take a look at how a few of the major companies are affected due to federal law and historically low interest rates.

3M – The company had assets of $11.6B at the start of 2011 in its pension fund. It made a contribution of $680M in 2011, thus taking the assets to $12.1B. However, the company’s liabilities recorded a 18% increase, thus ballooning up to $14.5B. This has led to a shortage of $2.4B.

GE – GE’s pension fund was over funded till December 2007, and the company had not made a pension contribution since 1987. However, since then, the company’s liabilities have increased and the company expects to make a contribution of $1B in 2012 and $2.1B in 2013. The company has also closed the defined pension benefit program to all its new hires.

Boeing – Boeing’s pension liabilities have increased by 63% in the last year, reaching a figure of about $2.6B. The company will have to make a sizable contribution in 2012 to bring it under control.

Honeywell – The company had a plan of fully funding its pension plan in four years. The plan was funded to the extent of 83%. However, the company’s liabilities have risen and it will have to make a contribution of around $1B in 2012

Lockheed Martin – The company anticipated the rise in liabilities and has pumped $6B in its plan in the past three years. This has helped to curb its anticipated contribution in 2012 to about $1.1B

Delta Airlines –  The company’s funding deficit for the pension plan has widened from $9.3B in 2010 to about $11.5B. The company’s plan which was funded to the tune of 47% last year is now only 40% funded.

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