By Michael Rapoport
When General Motors Co.'s pension plan took a big hit earlier
this month, it joined hundreds of companies facing growing pension
shortfalls as Americans keep living longer.
Longevity has a downside for those paying the bills, and the
higher costs now have to be reflected on corporate balance sheets
because of new mortality estimates released in October.
In its first revision of mortality assumptions since 2000, the
Society of Actuaries estimated the average 65-year-old man today
will live 86.6 years, up from the 84.6 it estimated a decade and a
half ago. The average 65-year-old woman will live 88.8 years, up
from 86.4.
The new estimates won't affect many U.S. companies, which long
ago shifted their employees to defined-contribution plans like
401(k)s, which leave workers on their own after retirement. But
they are hitting other big companies with defined-benefit plans
that have to make payments to some former employees for as long as
they live. The changes may also prompt more companies to take steps
to reduce the risks associated with their pension plans, experts
say.
When GM announced fourth-quarter earnings Feb. 4, it said the
mortality changes had caused the funding of its U.S. pension plans
to fall short by an additional $2.2 billion and contributed to
significant pension losses that will be filtered into its earnings
over a period of years.
Verizon Communications Inc. and AT&T Inc. recorded big
charges to earnings tied to their pension and retiree-benefit plans
partly as a result of the new estimates , and the changes could
have a significant impact across corporate America. Consulting firm
Towers Watson estimates the funding status of 400 large U.S.
companies could weaken by a total of $72 billion as a result.
The cost is another weight on pension-plan operators already
wrestling with the impact of declining interest rates. Lower rates
boost the current value of the future payments the plans have
promised to retirees because the value of future pension
obligations isn't discounted back to the present as dramatically.
That raises the current value of pension obligations, making
pension plans more underfunded.
Some companies will see a quicker, more concentrated impact than
others. Ultimately, the mortality changes are expected to affect
most or all companies with old-style defined-benefit pension plans
that commit to specified payout levels through their retirees'
lifetimes.
Larger companies tend to still have a higher proportion of
employees in defined-benefit plans. According to 2014 data from the
Bureau of Labor Statistics, 41% of workers at companies with 500
employees or more participate in such plans, compared with just 16%
in the U.S. private sector as a whole. Overall, there were 15.7
million active participants in private-sector defined-benefit
pension plans in 2012, according to the Labor Depatment. That
represents a 48% decline from 1980, which was the peak of
participation in such plans.
"Most of the major plans are certainly going to be affected in a
meaningful way" by the mortality changes, said Bruce Cadenhead,
chief actuary for the U.S. retirement business at Mercer, another
consulting firm.
Mercer and Towers Watson estimate that pension plans' funded
status--their assets as a percentage of their obligations--dropped
by nine percentage points in 2014 from a year earlier, with the new
mortality tables a significant contributor. Mercer and Towers
Watson put pension plans' funded status at 79% and 80%,
respectively.
The math is pretty straightforward: Longer lives lead to more
pension payments by companies, and thus higher costs. But the
timing of the financial hit varies.
The new mortality assumptions are having the biggest, most
immediate effect on companies like AT&T and Verizon, which have
revamped their pension accounting over the past few years to show
gains and losses in the year they occur. Most companies still
smooth out the changes over a period of years, meaning smaller hits
to their profits in any given earnings report.
Last month, AT&T took a fourth-quarter pretax charge of $7.9
billion on its pension and retiree benefit plans. It said the
charge stemmed largely from declining interest rates, but it also
cited the new mortality assumptions. In its annual report, filed
Friday, AT&T also said its own update of mortality assumptions
boosted its pension and retiree-benefit obligations by $1.5 billion
in 2014.
Verizon took a pretax charge to earnings of $7 billion last
month, citing the change in mortality assumptions, lower interest
rates and severance costs. The telecommunications company declined
to comment.
Other companies that recognize pension gains and losses upfront
also faced a significant fourth-quarter impact from the mortality
changes. Kraft Foods Group Inc.'s fourth-quarter earnings fell $757
million earlier this month because of the mortality assumptions,
according to figures in the company's annual report. Part of
Kellogg Co.'s pretax $822 million fourth-quarter pension charge
came from the mortality changes, though the company said declining
interest rates were a bigger factor.
Though Kraft noted its operating profit and per-share earnings
both grew in 2014 if changes in retiree-benefit plans were
excluded. Part of Kellogg Co.'s pretax $822 million fourth-quarter
pension charge came from the mortality changes, though the company
said declining interest rates were a bigger factor. The changes
could lead companies to increase voluntary contributions to their
pension plans. They could also encourage companies to take such
steps as offering lump-sum buyouts to retirees or transferring
pension obligations to insurers to reduce their pension risks.
Kimberly-Clark Corp., for instance, said Monday that it had
purchased annuity contracts from two insurers that will offload
responsibility for pension benefits for 21,000 of the company's
retirees. The move will reduce Kimberly-Clark's pension obligations
by about $2.5 billion and will lead it to take a pretax
second-quarter charge of $1.3 billion.
The mortality changes weren't the only factor in the company's
move, but they "highlighted the volatility of sponsoring a large
pension plan and played a part in our decision," a Kimberly-Clark
spokesman said.
Some companies may see the impact of the mortality changes play
out over a longer period if they still smooth pension gains and
losses into their results gradually.
GM said it expects a $295 million reduction in its 2015 earnings
as it begins to filter in pension losses stemming from the
mortality changes and the interest-rate declines, primarily
involving its non-U.S. plans. The company also said earlier this
month that $2.2 billion of the additional $3.6 billion of
underfunding its U.S. pension plans experienced in 2014 was due to
the mortality changes.
Similarly, General Electric Co. estimated that the new mortality
assumptions could cause its retiree obligations to rise by $5
billion and hurt its profit this year.
GE will likely provide an update in its annual report, a
spokesman said. A Securities and Exchange Commission official
recently suggested that companies should tell investors sooner
rather than later about the mortality assumptions' impact.
Companies "should disclose the impact of mortality to the extent
it results in a significant change" in pension obligations, said T.
Kirk Crews, an SEC professional accounting fellow, at a December
conference.
Write to Michael Rapoport at Michael.Rapoport@wsj.com
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