International Paper said it will make a $1.25 billion voluntary contribution to its US tax-qualified defined benefit pension plan by Sept. 15, and is taking additional steps in the second half of 2017 to reduce risk related to the plan.
“We see this as a really important step … a series of steps since 2004 to mitigate what has become a real risk factor in our enterprise,” said Guillermo Gutierrez, International Paper’s vice president, investor relations, in a conference call with analysts. “We feel more confident that we’ve enabled the company to operate in a lower-risk mode while also addressing our balance sheet.”
The move continues a trend among companies to proactively boost funding to their pensions fund. According to Goldman Sachs Asset Management, 2016 was the strongest year for contributions to US corporate defined benefit plans since 2013, and it expects contributions to increase another 10% this year.
The company said it would issue debt to help raise the majority of the pension contribution. According to an SEC filing, the company priced $1.0 billion of 4.350% senior unsecured notes due 2048. The filing indicates that the company will use this issuance toward the pension boost.
“As we pay down the pension gap, which was $3.4 billion at end of 2016, we are also taking meaningful and deliberate steps to de-risk our pension plan,” said International Paper CFO Glenn Landau during the analyst call.
Landau said there were multiple reasons for making such a sizeable contribution now. He said the company’s analysis shows that it was very likely it would have to make contributions totaling $1.25 billion over the next several years anyway, and contributing to the company’s pensions is considered debt reduction by the debt agencies. He also said that the expected $400 million in tax benefits from the contribution is now locked in prior to any potential reduction in corporate taxes. And he added that the move would reduce the company’s Pension Benefit Guaranty Corporation (PBGC) premiums by $35 million to $45 million a year.
Landau said that because the benefits of the contribution outweigh the cost of the debt, the company doesn’t expect to make any required contributions to its pension fund over the next five years.
The company said it is considering the possibility of seeking out an insurance company to take on the pensions assets and liabilities as another de-risking mechanism, although it currently has no plans to do so.
“It’s an option out there as we look at the plan and the constituents in the plan,” said Landau. “It’s something we see as a tool in our arsenal, and we’ll evaluate multiple de-risking options over the next couple of years.”