After neglecting their pensions for years, companies are racing to use a tax break on debt to shore up their funds before its gone. Bloomberg explains how borrowing now will save companies money. Molly Smith and Katherine Chiglinsky write:
If a company acts now, a $1 billion contribution would only cost $650 million after taxes, based on 2017 rates. But once the corporation has passed the due date of its 2017 return, including extensions, the $1 billion contribution would cost $790 million after taxes.
On top of that, the cost of government insurance on unfunded pension obligations has jumped in recent years– the fees now are more than four times their level in 2013. That’s part of the reason employers increased their contributions about 19 percent to an estimated $51 billion last year, according to Willis Towers Watson’s Beth Ashmore.
“It’s starting to become more and more expensive to make the decision not to fund,” said Ashmore, who’s a senior consultant.
Other factors may also move companies’ pensions closer to being fully funded this year. The U.S. stock market has risen more than 385 percent since March 2009 after accounting for dividends, boosting investment returns for pensions that own equities. Longer-term Treasury yields have been rising this year, which can help reduce the accounting value of future obligations. And companies have been contributing more to their plans — last year’s estimated $51 billion was up from $43 billion the year before, according to Willis Towers Watson.
Read more here.
Jeremy Jones, CFA
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