Across multiple U.S. industries, companies are facing massive increases in their pension costs.
Delta Airlines reported noncash pension expenses increased $550 million. 3M Co. disclosed a $125 million increase year-over-year.
Sysco Foods estimated a $26 million increase due to higher pension costs and interest rates.
In this unsettling time for financial markets, high inflation, no company has been able to escape the rising interest rates. As bank interest rates go up, so does cost to companies. Maintaining defined benefit pensions gets more expensive due to interest costs.
Those interest rate hikes could actually be a good thing for pension holders, on one hand, because higher rates decrease liabilities and increase pension funding.
According to Michael Moran, senior pension strategist at Goldman Sachs, in 2022, the average rate of return for a corporation’s defined benefit plan declined by 18% and some saw declines of as much as 25%. As of January 31, 2023, defined-benefit pension plans sponsored by the S&P 1500 had an average of 103% funding – up 6% from the year before, and reaching a 20-year high.
What is great for pension plan holders is clearly not as advantageous for corporations looking out for their bottom line, not yours.
Companies are hinting at potential changes to their employee pension plans, as they grapple with rapidly rising costs of maintaining them. Sysco Corp. Interim CFO Neil Russell said, “This increase in expense was primarily due to increased pension expenses, which were a result of higher interest rates.”
In the quarter ending December 31, Sysco de-risked nearly $700 million of its pension liabilities to Mass Mutual.
Moran warned that “higher interest rates, and therefore higher funded levels, have made it easier for sponsors to effectuate a pension risk transfer… We saw a record year for pension risk transfer activity in 2022 and expect 2023 to be another robust year.”
In an advisory, Goldman Sachs encouraged plan sponsors to “consider prudent risk management actions” that may include transferring retiree healthcare plans to fund liabilities. Such risk management actions protect plan sponsors, but put retiree pensions at greater risk.
While the future can’t be known for certain, these companies may eventually be following Verizon, AT&T and other companies’ lead by opting to spin off pensions in an effort to mitigate future pension related costs and responsibility.
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