Clock ticking for pension sponsors to take advantage of tax law

Sponsors of corporate defined benefit pensions have until mid September to write off voluntary contributions to plans at the former corporate tax rate, according to analysis from Goldman Sachs Asset Management.

Last year’s Tax Cuts and Jobs Act, which slashed the corporate tax rate from 35 percent to 21 percent, has helped motivate one of the most active periods for defined benefit sponsors in recent memory, writes Mike Moran, a managing director and pensions strategist for GSAM.

“The first half of 2018 was one of the most active periods for corporate defined benefit plans in recent years,” writes Moran. “The impact of corporate tax reform, combined with rising Pension Benefit Guaranty Corporation premiums, helped to spur notable voluntary contribution activity from sponsors.”

Along with the opportunity to write off pension contributions at the prior 35 percent corporate tax rate, rising PBGC variable premiums on plan deficits have encouraged more sponsors to make contributions far above the statutory minimum. Moran says the variable rate is now generally assessed at 3.8 percent, and is scheduled to rise to 4 percent by 2020.

A raft of voluntary contributions has been disclosed since passage of the Tax Cuts and Jobs Act last December. FedEx, PepsiCo, Verizon, and John Deere are among the plan sponsors that have pledged $1 billion or more in voluntary contributions. More may come as the current earnings season commences.

“We would expect that additional sponsors may consider making discretionary contributions as the window of opportunity to potentially capture the higher tax deduction quickly begins to close,” writes Moran.

The S&P 500 company sponsors GSAM works with are projected to make $60 billion in contributions in 2018, most of which are above the mandatory contributions set by PBGC. Last year the same cohort was equally aggressive, even before passage of the TCJA, making about $63 billion in contributions. That was the highest level of contributions since 2003. Moran states that many of the sponsors had little or no required contributions to make.

That funding, along with sound returns in equity markets and rising interest rates—the latter lowers the cost of projected liabilities—has continued to move the aggregate funding level for corporate pensions higher.

GSAM estimates the funded status of the entire U.S. corporate pension system to be 89 percent, up from 81 percent at the end of 2016.

Improved pension funding may encourage more sponsors to transfer risk through annuity buyouts. FedEx announced a $6 billion transaction in May, and Raytheon announced a nearly $1 billion transfer this week.

“In the past, some sponsors may have wanted to annuitize a portion of their plan but perhaps did not want to make a contribution in order to complete the transaction. Now, more sponsors are willingly making sizable contributions, which could make an annuitization transaction easier to complete,” writes Moran, who cited LIMRA data showing 2017 was the most active year for risk transfer annuity deals since 2012.