with traditional pensions expect to spend hundreds of millions of dollars to
shore up their defined benefit plans during 2017.
Xerox Corp., for
instance, expects to contribute $350 million to its defined benefit plan in
2017, nearly double the amount of its contribution in 2016. DuPont says it will
contribute $230 million to its main US pension plan this year, similar to the
2016 total, and hundreds of millions more to other plans.
And U.S. Steel
predicts its pension expense will reach $180 million in 2017. The company put
shares worth $100 million into its pension plan last year.
long-established employers have been moving away from traditional pension plans
toward defined contribution plans. To reduce pension risk, they’ve been closing
plans to new employees, freezing benefits for existing workers and offering
lump-sum buyouts to former employees.
In the meantime,
returns in their pension plans have been hurt by rock-bottom interest rates and
weak performance by bonds.
Xerox, for its part,
says in its recent annual report that its pension plans were underfunded by
nearly $2.2 billion at the end of 2016. While the Norwalk, Conn.-based company
has frozen pension benefits, there’s enough uncertainty around future expenses
that the pension appears among the risk factors in Xerox’s annual report.
Xerox’s pension plan
allocation in 2016 included 30% stocks, 48% fixed-income instruments, 6% real
estate, 8% private equity and 8% other.
U.S. Steel is in a similar situation.
It froze pension benefits at the end of 2015, instead giving steelworkers 50
cents an hour as a contribution to their defined-contribution plans.
While most corporate pension plans
employ conservative asset allocations, U.S. Steel says in its recent annual
report that stocks and private equity account for fully 60% of its portfolio.
The Pittsburgh-based company made a
well-timed move in August 2016, when it contributed 3.8 million shares of
common stock valued at $100 million to its main pension plan.
The move proved prescient. U.S. Steel
shares were valued at $26.57 at the time the company made the contribution to
the pension plan. Since then, they’ve soared 40%.
DuPont announced in late 2016 that it
would freeze pension benefits for existing employees. Meanwhile, during the
fourth quarter, DuPont paid out $550 million in lump-sum payments to former
employees who opted for a one-time payment over future pension benefits, the
company said in its recent annual report.
Xerox, U.S. Steel and DuPont join
other large, established companies in warning investors about large pension
expenses. General Electric expects to contribute $1.7 billion to its pension
plan in 2017. Caterpillar anticipates a contribution of $610 million this year.
And Merck projects a $235 million contribution to its pension plan in 2017.
Johnson & Johnson didn’t project
its pension contribution for 2017, but it contributed $838 million to pension
plans in 2016. Meanwhile, Johnson & Johnson paid $420 million in lump-sum
payments to former employees who agreed to them.