The public pension crisis continues, but there is a bit of good news out of the corporate pension world. Funding status for corporate defined pension plans in the U.S. has jumped close to 95%, which is the highest percentage recorded since the global financial crisis.
Corporate tax cut helps restore pension funding
In a recent report, HSBC Credit Strategy Head Edward Marrinan and Fixed Income Strategist Shrey Singhal partially credit the Trump administration’s Tax Cut and Jobs Act for the improvement in pension funding.
Under the provisions of the tax cut, U.S. companies were able to deduct contributions to their pension funds from their taxable income through Sept. 15 at the 35% corporate tax rate. To be eligible for the deduction, the contribution must be made within 8-and-a-half months of the end of the pension plan year. The HSBC team believes the deadline provided enough motivation to convince U.S. corporations to make contributions.
The Federal Reserve estimated that private pension plans held approximately $3.4 trillion worth of assets as of June 30.
Private pension funding status in recovery
According to HSBC, funding levels in the private sector have climbed dramatically in the recent years and ended September 94.5% funded. That marks a significant narrowing of the funding deficit which opened up after the 2008 global financial status. As of the end of 2011, the corporate pension deficit was at 78.9%, based on the 100 biggest plans represented in Milliman’s 100 Pension Funding Index.
In addition to the tax cut act, the HSBC team also credits the strong stock market performance for the significant increase in funding among private pension plans. They also believe companies were motivated to fund their pension plans because borrowing costs were so low, noting that last year, many companies in the U.S. issued debt to fund their contributions. Among the companies that did this was General Electric, which issued $6 billion in new debt to top up its underfunded pension plan.
PBGC change also contributed to pension improvement
Another factor the HSBC team mentioned was the upcoming plan to improve the Pension Benefit Guaranty Corporation’s pension insurance program. The fiscal 2019 budget includes a proposal to introduce a variable-rate premium for the program. That means any pension plans which have a funding status that’s under a particular percentage would be charged a higher insurance premium because they face an increased risk of becoming insolvent.
The 2019 federal budget also proposed assessing an exit premium of 10 times the highest premium rate on any employers withdrawing from a multi-employer pension plan. That exit premium would account for the additional risk the PBGC faces every time an employer withdraws from a plan, a trend which has been on the rise in recent years.
The proposed changes are expected to keep the multi-employer pension insurance program solvent through 2040, the HSBC team added.
Underfunded pension crisis continues in public sector
Although the private sector’s pension position appears to have improved significantly over the last couple of years, public pensions remain in crisis. PBS Frontline correspondent Martin Smith told Forbes contributor Richard Eisenberg of Next Avenue recently that about half of U.S. states have public pensions that which are severely underfunded—as low as 70% in many cases and even worse in some.
He also had a dire forecast for these states if the public pension crisis continues. Smith believes that in only four or five years, states with severely underfunded public pension plans will be forced to cut public services if they don’t get a federal bailout. However, a federal bailout would create a whole new set of problems for everyone else.
The public pension crisis is driving some public employers, such as the State of Arizona, to seek lifelines for their underfunded pensions. Arizona voters are set to vote next week on a measure that would save the state $275 million over the next 20 years. However, it would also mean government retirees in the state wouldn’t see a significant increase in benefits in years when investment returns are particularly strong, Bloomberg explained.
Meanwhile other efforts are going on in other states. For example, Taxpayers United of America is trying to affect change with a recent study, which suggested the state’s public sector pension plans are simply too expensive, the Illinois News Network reported.
This article originally appeared on ValueWalk Premium