For Large Employers, Pension Costs Will Continue to Mount in 2017


Companies look to reduce pension risk, as plans continue to be hurt by rock-bottom interest rates and weak performance by bonds.

Old-line companies with traditional pensions expect to spend hundreds of millions of dollars to shore up their defined benefit plans during 2017.

Xerox Corp., for instance, expects to contribute $350 million to its defined benefit plan in 2017, nearly double the amount of its contribution in 2016. DuPont says it will contribute $230 million to its main US pension plan this year, similar to the 2016 total, and hundreds of millions more to other plans.

And U.S. Steel predicts its pension expense will reach $180 million in 2017. The company put shares worth $100 million into its pension plan last year.

Large, long-established employers have been moving away from traditional pension plans toward defined contribution plans. To reduce pension risk, they’ve been closing plans to new employees, freezing benefits for existing workers and offering lump-sum buyouts to former employees.

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In the meantime, returns in their pension plans have been hurt by rock-bottom interest rates and weak performance by bonds.

Xerox, for its part, says in its recent annual report that its pension plans were underfunded by nearly $2.2 billion at the end of 2016. While the Norwalk, Conn.-based company has frozen pension benefits, there’s enough uncertainty around future expenses that the pension appears among the risk factors in Xerox’s annual report.

Xerox’s pension plan allocation in 2016 included 30% stocks, 48% fixed-income instruments, 6% real estate, 8% private equity and 8% other.

U.S. Steel is in a similar situation. It froze pension benefits at the end of 2015, instead giving steelworkers 50 cents an hour as a contribution to their defined-contribution plans.

While most corporate pension plans employ conservative asset allocations, U.S. Steel says in its recent annual report that stocks and private equity account for fully 60% of its portfolio.

The Pittsburgh-based company made a well-timed move in August 2016, when it contributed 3.8 million shares of common stock valued at $100 million to its main pension plan.

The move proved prescient. U.S. Steel shares were valued at $26.57 at the time the company made the contribution to the pension plan. Since then, they’ve soared 40%.

DuPont announced in late 2016 that it would freeze pension benefits for existing employees. Meanwhile, during the fourth quarter, DuPont paid out $550 million in lump-sum payments to former employees who opted for a one-time payment over future pension benefits, the company said in its recent annual report.

Xerox, U.S. Steel and DuPont join other large, established companies in warning investors about large pension expenses. General Electric expects to contribute $1.7 billion to its pension plan in 2017. Caterpillar anticipates a contribution of $610 million this year. And Merck projects a $235 million contribution to its pension plan in 2017.

Johnson & Johnson didn’t project its pension contribution for 2017, but it contributed $838 million to pension plans in 2016. Meanwhile, Johnson & Johnson paid $420 million in lump-sum payments to former employees who agreed to them.

By Jeff Ostrowski

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