Deere, 3M See $76 Billion Pension Burden Easing on Fed

3M Co. (MMM) and Deere & Co. (DE) are among U.S. employers seeing pension costs drop from a $76 billion peak, freeing up cash to spend or return to investors, as the Federal Reserve’s pullback on bond buying boosts interest rates.

The drain on company cash is easing after rising rates and surging stock prices helped increase the pension funding levels to 93 percent last year for 418 large companies with U.S. plans, from 77 percent a year earlier, consultant Towers Watson said yesterday in a report.

Pension expenses for Standard & Poor’s 500 Index companies jumped fourfold in 2012 from $19 billion in 2008, according to data compiled by Bloomberg. Now, 2013’s increases in interest rates and equities probably will continue this year as the Fed begins to taper bond purchases, pushing defined-benefit plans closer to full funding levels, Towers Watson said.

“A lot of good news has flowed their way, and they’ll have more options and opportunities this year than they did last year,” Dave Suchsland, a Towers Watson senior consulting actuary based in Philadelphia, said in a telephone interview.

Deere, the world’s largest maker of agricultural equipment, has projected pension expenses to be $150 million lower in 2014. 3M, whose products range from Scotch tape to dental braces, is forecasting costs as low as $100 million, down from $534 million in 2012.

Photographer: Luke Sharrett/Bloomberg

Deere, the world’s largest maker of agricultural equipment, has projected pension expenses to be $150 million lower in 2014. Close

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Photographer: Luke Sharrett/Bloomberg

Deere, the world’s largest maker of agricultural equipment, has projected pension expenses to be $150 million lower in 2014.

As pension funds become fully funded, more companies may look at matching liabilities to assets to ward off future market crashes, according to pension advisory firms including Milliman Inc. and Towers Watson. Others are using the higher funding status to reduce risk by paying retired employees lump sums.

Reduced Risk

When many pensions were overfunded last decade, companies failed to take steps to reduce risk. They probably won’t pass up the opportunity this time, Suchsland said.

Ford Motor Co. has begun to move more of its pension investments to fixed income to reduce volatility. The Dearborn, Michigan-based carmaker now expects required annual cash contributions to its pension funds will drop to $1 billion to $2 billion over the next three years from an earlier estimate of $2 billion to $3 billion as rates move higher.

“Because of the strategic actions that we’ve been taking along with increases in discount rates, we estimate that the underfunded status of our global pension plans at year-end 2013 will be reduced to about $10 billion,” Chief Financial Officer Robert Shanks said during a Dec. 18 presentation to investors.

Fed Taper

Pension fund liabilities are projected using an interest rate based on a group of corporate bonds, known as the discount rate. The higher the rate, the lower the liability.

The prospect of Fed tapering driving up interest rates will help companies such as Joy Global Inc. (JOY), a Milwaukee-based maker of mining equipment. Joy Global estimates its pension contribution will drop to less than $50 million per year over the next few years from $166 million in 2013.

“With the company’s pension plans now approaching fully funded status, the go-forward discretionary contribution rate is expected to be less than $50 million per year for the next few years,” Chief Financial Officer James Sullivan said on a Dec. 11 earnings conference call.

It’s also good news for employees. Companies that stuck by their defined-benefit pension plans through the difficult years now are unlikely to seek to disband the benefit, Suchsland said.

“By now, the ones who still have an active plan have looked at it and made a conscious decision to keep it,” Suchsland said. “The economics this year are going to be more favorable to them.”

Boeing Exception

One exception is Boeing Co. The Chicago-based planemaker is seeking union approval for a second time to freeze its pension plan for new hires as part of a deal to keep production of the new 777X wide-body jet in the Seattle area.

Boeing wants to convert the pension plan to a 401(k)-style retirement program, where the employer matches worker contributions instead of paying benefits at a set monthly amount. Boeing’s machinists rejected the proposal in November and are voting on it again today.

With Fed tapering signaling the U.S. economy is strong enough to resume good growth without stimulus, stocks may climb along with rates.

Honeywell International Inc. (HON), the Morris Township, New Jersey-based producer of goods as varied as aircraft engines and work boots, is counting on that to forecast a $100 million drop in its pension contribution in 2014, Chief Financial Officer Dave Anderson said in a Dec. 17 conference call with analysts.

“If the economy continues to recover and we have modest gains on the equity side, it could be a second consecutive win-win year for pension funding,” said John Ehrhardt, a New York-based principal and consulting actuary for Milliman.

To contact the reporter on this story: Thomas Black in Dallas at tblack@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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