GE gaping pension deficit tiny part of companies’ $269b gap

Bloomberg

General Electric’s gaping pension deficit certainly stands out for its size. But the company is hardly the only one at risk of potentially shortchanging some of its employees come retirement.
All across corporate America, underfunded pensions have become the norm. Even now, a decade after the financial crisis, the largest plans face a shortfall of $269 billion, right about where it was 10 years ago. Years of low interest rates have largely offset gains in the stock market. Companies haven’t helped matters by lavishing money on shareholder rewards and clinging to assumptions about returns that proved to be too rosy.
The situation isn’t likely to improve any time soon, particularly if interest rates keep falling. Even though a banner year in both stocks and bonds lifted returns on the largest pensions by 12% this year, their liabilities have grown even faster, according to consulting firm Milliman.
And while GE’s move to freeze benefits and set aside money will help trim its $22.4 billion pension shortfall by as much as $8 billion, Chief Executive Officer Larry Culp said last month that low rates could boost those same liabilities by roughly $7 billion.
In other words, unless companies take even more drastic steps, they’re currently doing little better than treading water.

Falling Short
“Plan sponsors are getting concerned that we’ve had a historic equity run in the market and they’re still sitting on underfunded pension positions,” said Steve Keating, managing director at BCG Pension Risk Consultants. Part of it has to do with what’s called the discount rate, which for corporate pensions typically corresponds to yields on highly rated corporate bonds.
Simply put, the lower the discount rate, the less a plan assumes it will earn over time. That means the plan needs to set aside more money today to cover retirement benefits a company has promised to pay its employees in the years and decades to come. In August, the discount rate fell to an average of 2.95%, the lowest level in the 19-year history of Milliman’s pension funding index.
Defined benefit plans, like your traditional corporate pensions, have largely disappeared from view in the past couple of decades as companies have embraced plans like 401(k)s. Employers can opt to contribute to those plans, but it’s the employees who are responsible for choosing the right investments and are solely on the hook if those investments fare poorly.
Nevertheless, there are plenty of older employees and retirees that are collectively still owed tens of billions of dollars in benefits that companies have failed to adequately fund.
GE’s predicament underscores the scope of the problem. The company said it would freeze pension benefits for more than 20,000 employees and set aside as much as $5 billion to cover future obligations.