$20 billion club update

It’s been a few months since we last looked at developments at the $20 billion club. In this post, we discuss differences in attitudes to funding and take a look at settlement accounting.

The largest, and generally the leaders

One of the more popular topics that we cover in this blog is the $20 billion club—our name for the 20 U.S.–listed corporations with the largest pension liabilities. This group represents a total of more than $900 billion in worldwide pension liabilities. Being made up of the largest means this group also tends to be early in its recognition of emerging issues, so in understanding the actions and motives of these 20 corporations, we gain insight into the trends affecting the corporate pension community as a whole.

Since our update in March, there have been three quarters of earnings calls for each corporation and two have published annual reports: Federal Express and Hewlett–Packard (these two corporations do not report on a calendar year basis as the others do.) There have been no headline–grabbing developments related to pensions but a couple of noteworthy points do jump out.

Attitudes to funding

We continue to await the first explicit reference to PBGC premiums affecting funding policy from a corporate officer at one of the club. And it is clear that not every CFO is looking at the funding question from the same perspective.

Let me hand over to my colleague Justin Owens to expand on that point:

“There is a meaningful divergence in funding policies among these companies, as articulated in their earnings calls. For some of the sponsors, not having to pay contributions now is unilaterally perceived as a good thing. We—and others—have argued that if they don’t pay those contributions now, they’ll pay them later with a potentially significant PBGC premium loading on top, but that message doesn’t seem to resonate for those sponsors yet. Analysts certainly aren’t asking those questions.”

He continues: “Ford is one exception, GM another. GM borrowed $2 billion to fund their plan, a move which CFO Charles Stevens described as ‘a risk management approach to push out some of the timing on the liabilities into a 20–and 30–year timeframe and push out mandatory contributions from maybe 2019 and 2020 to the early 2020s, 2022, 2023.’¹”

So even just looking at these twenty corporations, we see materially different attitudes toward funding policy, and materially different actions being taken as a result.

Settlement accounting

Another topic worth a comment is settlement accounting. When there is a large enough transfer of liabilities, plan sponsors are required to accelerate the recognition of pension gains or losses in their earnings statements. This can crystallize shortfalls (or gains) that would otherwise have been recognized through the earnings statements only over a period of several years. With significant corporate restructuring activity and the wave of lump sum offers and pension annuity buyouts, references to pension–related settlement accounting have become more frequent in the past four years or so.

Even within just this group of 20 corporations, 2016 so far has seen settlement accounting being triggered for the following reasons:

• Hewlett–Packard CFO Cathie Lesjak referred to “a settlement expense of approximately $200 million for a lump sum offering made during Q3”²;
• DuPont’s CFO Nicholas Fanandakis to a “re–measurement we had to do because of the restructuring that was completed… over $2 billion of impact on the unfunded pension liability”³;
• United Technologies’ CFO Akhil Johri to an annuity buyout and lump sum offer resulting in “a noncash settlement charge in the range of $400 million to $530 million in the fourth quarter.”⁴;
• Verizon Communications’ SVP Investor Relations Michael Stefanski to “a noncash pre–tax loss of $165 million for a pension mark–to–market adjustment due to settlement accounting” and to a “pension re–measurement adjustment due to settlement accounting resulted in a $555 million charge”.⁵

We will continue to track and provide updates on developments at the $20 billion club.