General Electric Co. will issue new debt to prefund $6 billion in pension contributions next year, according to an investor update presentation from the company.
The news came as Boston-based GE announced a massive restructuring of its sprawling business units, and a 50 percent cut in its dividend.
GE sponsors two principal defined benefit pension plans, and nearly 50 legacy plans the industrial giant assumed over decades of acquisitions, according to the firm’s 2016 10-K filing with the Securities and Exchange Commission.
The company holds $71.5 billion in benefit obligations in the GE Pension Plan, which accounts for about 467,000 beneficiaries, and the GE Supplementary Plan, an unfunded plan for higher-level employees. GE closed access to the defined benefit plans for new hires in 2012.
The smaller legacy plans account for another $22.5 billion in pension obligations, putting total obligations at $94 billion.
All together the plans hold $62.9 billion in assets, making for a $31.1 billion funding shortfall, or a funded status of 67 percent.
GE’s funding shortfall is by far the largest among S&P 500 companies, according to analysis by Bloomberg.
According to SEC filings, GE’s policy is to make the minimum contribution to its pension plan required by the Pension Benefit Guaranty Corp., the federal agency that insures private-sector single employer defined benefit plans.
But the filing also says the company may determine to make additional contributions. In 2016, $330 million was contributed to the GE Pension Plan. A $1.7 billion contribution has already been made this year.
Could be a record
The $6 billion debt-financed contribution is one of the largest on record, according to a blog post by Justin Owens and Bob Collie, pension analysts with Russell Investments.
The new cash will cover funding obligations through 2020. In 2016, GE paid out $3.4 billion in pension benefits.
Owens and Collie say that GE’s discretionary contribution above PBGC’s minimum requirements, and the use of corporate debt to fund it, are both trends among the nation’s largest pension sponsors.
Among the 19 sponsors that comprise Russell’s $20 billion club—plans with at least that much in pension liabilities—discretionary contributions are peaking.
So far, $15 billion in extra funding has been made in 2017. FedEx and DuPont used a combination of debt and cash to pump and $1.5 and $1.7 billion, respectively, toward their obligations; Verizon invested $3.4 billion in discretionary funding, minimizing funding requirements over the next three years; and Boeing paid $3.5 billion down, which the company said will cover funding obligations through 2021, according to Russell’s post.
GE’s move represents a “dramatic shift” in the company’s funding policy, say Owens and Collie.
Increasing PBGC variable premiums are forcing sponsors’ hand. The variable rate of 3.4 percent that companies pay on unfunded liabilities is scheduled to rise to 3.8 percent next year, and 4.2 percent in 2019.
Five years ago the variable rate was 1 percent. “At those levels, many sponsors are concluding that it simply doesn’t make sense to allow a significant deficit to persist in the plan,” write Owens and Collie.
Corporate tax reform may offer an incentive to the largest plans to make more discretionary contributions before the end of the year.
“If the corporate tax rate looks set to fall in future years, then there’d be a big advantage to contributing in 2017, hence obtaining a deduction at a higher rate, rather than deferring contributions,” say Owens and Collie.