Looming Tax Changes Push DuPont to Boost Pension Payments
May 09 2017 - 6:11PM
Dow Jones News
By Vipal Monga
DuPont Co. will make larger payments into its pension than it
had planned this year as part of a push to maximize tax deductions
before a potential overhaul of U.S. corporate tax rules.
Pension contributions are tax deductible, therefore it is
cost-effective to take a 35% deduction at today's rate instead
doing it later, if rates fall. DuPont decided to pump extra money
into its pension fund to deduct as much from its taxes as it could,
according to a person familiar with the plan.
On May 2, Delaware-based DuPont said it would put $2.7 billion
more than required to its defined benefit plans this year. Its
plans had a $6.7 billion deficit at the end of 2016, meaning the
value of assets didn't equal the value of the company's
obligations.
DuPont is among the first to use the prospect of tax cuts as a
spur to rush pension contributions. More companies are expected to
take similar steps in coming months as the tax debate in Washington
heats up, according to Alan Glickstein, a retirement consultant at
Willis Towers Watson.
The debate could go in unexpected directions, and companies may
need to move soon to protect their current deductions. "There's no
guarantee that pension contributions would be even fully tax
deductible under tax reform," he said.
The White House and Congress want to revamp the U.S. tax code by
cutting rates and reducing its complexity. The initiative is in
early stages, however, and there is already disagreement between
various factions of the Republican Party, which controls Congress
and the White House, about how to pay for tax cuts.
DuPont had expected to contribute only $230 million this year,
but management decided to capitalize on low interest rates and
borrow cheaply in the bond markets to boost that amount.
"We are partially using debt as a funding source given the
favorable economic conditions to doing so, including the low
interest environment, " said a DuPont spokesman.
The move also reverses DuPont's long-held policy of contributing
the minimum required to its pensions.
By law, companies must fully fund their plans over time. The
formula used is set by Congress, and allows them several years to
make up the gap.
Companies such as Verizon Communications Inc., General Motors
Co., and International Paper Co. have also contributed more than
required in recent months, but they did so to avoid paying higher
insurance premiums to the Pension Benefit Guaranty Corp., the
nation's pension insurer. Companies must pay a fee to the PBGC for
every dollar their plans are underfunded. The average fee almost
quadrupled between 2009 and 2016, according to a study by October
Three Consulting LLC.
DuPont's case is also unique, because the company is merging
with Dow Chemical Co. The deal is expected to close later this
year, followed by a split into three units focused on agriculture,
industrial materials and specialty products within three years.
Management will also have to split the pension obligation
between the units, although they haven't determined the exact
amounts. A smaller deficit would make the task easier, said the
person with knowledge of the plan.
Pension obligations continue to be a burden to corporate balance
sheets.
Although rising stock markets have helped boost pension asset
values this year, falling interest rates have pushed up the value
of plan obligations, offsetting asset gains.
S&P 1500 companies with defined benefit plans were only 83%
funded at the end of April, the same as in March, according to
consulting firm Mercer. The plans had a combined deficit of $392
billion, $1 billion higher than March, but $16 billion lower than
the end of 2016.
As interest rates fall, the present-day value of future pension
obligations rises.
Write to Vipal Monga at vipal.monga@wsj.com
(END) Dow Jones Newswires
May 09, 2017 17:56 ET (21:56 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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