With the Pension Benefit Guaranty Corporation’s (PBGC) premium rates about to increase again, a confluence of factors is creating a positive climate for pension funds to borrow cash to boost funding levels and head
toward liability-driven investing (LDI).
Other influences are the decreased cost of issuing debt in the market, which
has fallen to about 1% in spread space, and the fear that future tax reform could
erode tax deductions. “If taxes decrease in the future, you’ve managed to contribute
today at a higher tax rate and get the big tax deduction,” said David Eichhorn
of investment advisory firm NISA in October. Finally, there’s the uncertainty of
whether markets can be the main driver of bailing a plan out of a deficit, and the
relative ease of accessing the capital markets—something which may change.
Take, for example, Delta Airlines. At first, the post 9/11 climate was forgiving.
The Pension Protection Act of 2006 (PPA) provided significant funding relief to
airlines that had frozen pension plans, with Delta receiving the most favorable relief.
PPA made two significant changes in the way minimum contributions were deter-
mined for corporate pension plans. It required:
• Plans to use interest rates based on current bond yields when calculating
funded status. Rates had been falling and have since continued to fall. Lower rates
result in a lower plan funded status and higher required contributions.
• Any underfunding to be paid in seven years; shorter than previously required.
However, under relaxed guidelines, Delta used an interest rate of 8.85% and
was given 17 years to pay down any (pension) underfunding.
Prospects align to make 2017 a year
for finding or borrowing wealth to fund
Reported by Christine Giordano / Art by Jun Cen