Low interest rates and underfunding of pension plans
SUSIE GHARIB: On that earnings call today, GM executives also discussed
their plan to freeze existing pensions for salaried workers and to offer 401(k)s instead. The move is aimed at easing the strain on the auto maker’s pension fund. It is under funded by more than 10 percent. As Darren Gersh reports, GM’s move reflects what is shaping up to be a very tough year for pensions plans and the people who rely on them.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: The word of the day at GM was de-risking — de-risking, as in reducing the financial risk posed by the car maker’s huge pension liability. GM has already frozen its plan. But it still expects lower investment returns on its pension fund will cost the company $800 million this year.
BRADLEY BELT, FMR. DIR., PENSION BENEFIT GUARANTY: There’s no question — for many companies, it’s going to be an extraordinarily challenging environment here over the next year.
GERSH: Analysts call the difference between the pension assets a
company has and the pension promises the company has made the pension gap.
For GM, the gap is $24 billion and for all U.S. companies, it’s somewhere between $335 billion and $431 billion.
BELT: The hole’s gotten pretty deep over the last few years. Unless you see a real turnaround in interest rates and a real turnaround in the stock market and alternative investments, the hole’s not going to be filled only through investment returns. That means it’s going to have to be filled through stepped up contributions.
GERSH: Like any savings account, pension plans are squeezed by the
low interest rates engineered by the Federal Reserve. But low interest rates also have a big impact in the formulas used to estimate pension liabilities. In general, when interest rates are low, companies crunching their pension numbers find they owe a lot more and that means they have less money to put to work creating jobs.
LYNN DUDLEY, SR. VP, POLICY, AMERICAN BENEFITS COUNCIL: There are many companies that are holding back on capital projects because of this exorbitant liability, which is a result of holding down interest rates — good for the economy, bad for pension plans.
GERSH: Already this year, companies ranging from Boeing (NYSE:BA) to
Verizon (NYSE:VZ) have pledged to make billion-dollar-plus contributions to their pension plans. But companies in declining industries like defense may have the hardest time closing the gap.
OLIVIA MITCHELL, PROFESSOR, THE WHARTON SCHOOL: Defined benefit plans have been under-funded for so long and they are facing such challenges that I sincerely doubt that many of them will be able to pull out.
GERSH: When companies can’t keep their pension promises, the
government often steps in. But the fund that backstops pension promises has its own gap. It’s under-funded by $26 billion. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.