Many big companies are looking to de-risk their pension plans by offering lump-sum payouts or cutting deals with insurance companies.
Some, however, are taking a different route. FedEx, for example, recently announced plans to contribute $1 billion to its U.S. pension plans before the end of its fiscal year ending May 29, 2020. That’s $300 million more than its expected minimum required contribution. It’s not a brand-new strategy: the company has annually been contributing at least $1 billion to the plans in recent years.
The move will hold down FedEx’s payments to the Pension Benefit Guaranty Corp., which charges plan sponsors an annual fee on their unfunded liabilities. This year the fee is 4.3% — significantly higher than the 3.1% coupon the company pays on its U.S. bonds.
At the end of its most recent fiscal year, FedEx had assets of $23.3 billion in its U.S. plans, against liabilities of $26.6 billion, for a funding ratio of 87.8%.
At about the same time as FedEx’s announcement, supermarket chain Kroger revealed that it too would make a $1 billion pension contribution this fiscal year.
Because of its pension contributions, which consistently exceed the company’s minimum required contributions, FedEx is in better shape with respect to pension funding than many other companies.
FedEx said in its most recent annual report that the company does not anticipate that any additional contributions to its U.S. pension plans will be required for the foreseeable future. That’s based on the plans’ funded status and the fact the company has a credit balance related to its cumulative excess voluntary pension contributions over those required. That excess currently tops $3 billion.
“We could eliminate all required contributions to our principal U.S. pension plans for several years if we were to choose to waive part of that credit balance in any given year,” the company said.
According to the Life Insurance and Market Research Association (LIMRA), deal volume in the pension risk transfer business hit an all-time high in 2018 and is on track to be even greater this year.
LIMRA research reveals that 52% of U.S. households with a member over age 70 have access to a defined benefit pension plan. At the low end of the scale, age 35 and under, just 14% of households enjoy the same access.
“The best investment strategy a business can adopt in regard to underfunded pension obligations is to get rid of the debt,” says Elliott Dinkin, president of Cowden Associations, a compensation, health and benefits, and retirement consulting firm. “Take existing assets, eliminate future uncertainty, and effectively settle a part of the obligation.”