Analysis: Rate pressures on pensions wipe out billions in profits

Thu Jan 31, 2013 6:59pm EST
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By Ben Berkowitz

(Reuters) - Pension charges wiped out more than $20 billion in fourth-quarter earnings at major American companies, as persistently low interest rates leave some of those with the largest retiree burdens no choice but to assume they need more money now to cover liabilities later.

Actuaries warn there is little chance for improvement on the horizon for defined benefit pension programs, as rates linger at historically low levels and the Federal Reserve shows no inclination to raise them. The only hope, they say, is for rates to turn around - though when, no one really knows.

Just between AT&T Inc (T.N: Quote) ($10 billion), Verizon Communications (VZ.N: Quote) ($7 billion) and UPS (UPS.N: Quote) ($3 billion), pension accounting has led to massive noncash charges in the last few weeks, and those three are not alone.

It is possible there will be even more before the reporting season ends. Employment lawyers say about 37 percent of people with retirement benefits still have a defined benefit plan or a mix of defined benefits and a 401(k), with little distinction across sectors.

The problem is an interest rate called the discount rate, a number that companies offering plans use to calculate the present value of their future obligations to retirees - how much they need today, in other words, to pay pensioners tomorrow.

Many large plan sponsors have chosen some version of mark-to-market accounting for their pension plans, which means they need to adjust their discount rate periodically (usually yearly) to market conditions.

When market forces dictate that they assume a lower discount rate, it can create a huge actuarial loss.

"The promises these companies have to their employees hasn't fundamentally changed at all," said Kevin Wagner, a senior consulting actuary at Towers Watson. "This is really driven by two things: one is that interest rates have just dropped, that's all, and secondly, different companies have made different decisions on how they want to account for pension plans."   Continued...

A view shows the AT&T store sign in Broomfield, Colorado April 20, 2011. REUTERS/Rick Wilking