COVID-19 relief law gives companies more time to fund pensions

Finance chiefs will get more time to cover their company’s pension deficit and more flexibility with the cash they have put into retirement plans as part of the new Covid-19 aid package.

Market disruptions caused by the pandemic and near-zero interest rates have made it harder for companies to manage their pension obligations, especially plans sponsored by a single employer. Low interest rates contribute to higher liabilities, increasing the amount of funding that companies need to set aside for pension obligations.

Single-employer plans often promise to pay out fixed sums to retirees, sometimes over several decades, similar to other defined-benefit plans. More than 20,000 U.S. companies offer these single-employer plans, according to consulting firm Mercer LLC.

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Many of these plans, which are largely underfunded, have fared well with the rise in the stock market over the past few months. The funding level of single-employer plans sponsored by S&P 500 companies rose roughly 4.7 percentage points to 91.5% at the end of 2020, compared with the previous year, professional-services firm Aon PLC said. The funded status has since climbed to 95.3% as of Feb. 28. The estimated aggregate deficit of single-employer pensions sponsored by S&P 500 companies was $102.1 billion as of Feb. 28, tumbling 72.8% from the prior year, Aon said.

But as interest rates are expected to remain low for a while, companies need long-term support to continue making contributions to their plans and to cover any potential future market volatility or cash crunch, advisers say.

The $1.9 trillion aid package that President Biden signed into law earlier this month helps sponsors of single-employer plans hold on to cash and delay paying off any deficit in their plan over a 15-year period vs. the current seven-year period. It also set aside about $86 billion for struggling multiemployer pensions, which are jointly run by unions and companies.

The law creates a more predictable and favorable basis for measuring the liabilities that ultimately determine the funding obligation, said Jonathan Price, a senior vice president at the Segal Group Inc., an employee-benefits consulting firm.

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Companies can use as a minimum, a corporate bond yield of roughly 5%, to determine the value of their pension liabilities. Before the law, there was no such minimum. The floor rate, which is higher than the current market rate, is expected to reduce short-term contributions that companies need to make for their plan.

“If you’re a CFO, the ability to, in any given year, not have an ironclad requirement to put cash into a pension plan is always a good thing,” said Matt McDaniel, a partner at Mercer.

The law also extends an existing option allowing companies to revise their funding obligations to help them free up cash. The U.S. government has provided this flexibility throughout the past decade, most recently in 2015. That option started to phase out earlier this year.

Under the Covid-19 package, companies can redeploy funds designated for 2019 and 2020 pension contributions, as long as they make those payments at a later date. The reduction in future pension costs creates an opportunity to use the cash to offset labor costs and stabilize the business amid the pandemic. The relief doesn’t pose an advantage to employees, except that companies could spend the funds on hiring or to avoid layoffs.

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Companies also can adopt these changes as far ahead as next year. The new law will largely start phasing out in 2026.

The option is intended to help chief financial officers and treasurers struggling to pay into single-employer plans as they invest in their businesses, Mr. Price said.

Airlines and hotel operators are among the companies that look to benefit most from the pension-relief measures, as businesses that have been hit the hardest look to better manage their cash.

United Natural Foods Inc., a Providence, R.I.-based food wholesaler, is assessing whether to make any changes to its pension contributions because of the legislation, but doesn’t expect a significant benefit if it did, CFO John Howard said. “We’re looking at it and I think it provides a little bit of relief,” he said.

The company’s single-employer plan covers about 27,000 employees, but is closed to new participants. United Natural Foods said it contributed $16.1 million to the plan for the fiscal year ended last August and has no contribution requirements for the current year. The current funding level is near 95%, a company spokesman said.

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Some companies won’t use the new flexibility available to them, including those winding down their single-employer plans. Those companies are looking to expedite their contributions, not slow them down, said John Lowell, a partner at advisory firm October Three Consulting LLC.

About 25% of about 22,520 single-employer plans were closed to new entrants or accruals in 2017, the latest available data, according to the Pension Benefit Guaranty Corp., the government’s pension insurer.

“Contributing less means that you will continue to have a big gap between your assets today and what it’s going to take to terminate the plan,” Mr. Lowell said.