Buffett's biggest deal casts light on pension burden

Tue Aug 11, 2015 2:29pm EDT
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By Richard Leong

NEW YORK (Reuters) - Growing pension obligations at Precision Castparts Corp PCP.N, which Berkshire Hathaway has agreed to buy for $32 billion, highlight an issue that large U.S. corporations still face, almost a decade into a low-interest rate environment.

Berkshire's boss, Warren Buffett, has himself highlighted rising pension cost as an area of concern for the American economy. Back in 2007, Buffett said in a letter to shareholders that S&P 500 companies should not expect above-average returns on their pension investments, as many companies publicly assumed at the time.

Obligations to retired workers pose an increasing risk to corporate bottom lines as investment returns in recent years have not consistently kept up with cost increases at most U.S. pension plans.

The industrial company Berkshire bought on Monday has been no exception, but the pension issue is not enough to raise alarm for Berkshire investors.

"It could raise its costs a bit, but for a company of this size, it's not significant," said Brian Reynolds, chief market strategist at New Albion Partners in New York.

Precision Castparts' pension promises to pay $2.84 billion to its more than 10,300 participants, but was underfunded by $615 million of as of March 29, the end of its most recent fiscal year. That level of underfunding was up 61.8 percent from the prior year.


Berkshire Hathaway CEO Warren Buffett plays bridge during the Berkshire annual meeting weekend in Omaha, Nebraska May 3, 2015.  REUTERS/Rick Wilking