Why Corporate America Is Rooting for Higher Rates: Verizon Communications Inc. (VZ), Ford Motor Company (F) and More

Page 1 of 2

According to economists, the current low-interest-rate environment is primarily intended to bolster business activity by making it easier for companies to invest in growth-producing projects. That’s been hard on savers, but increasingly, one factor has made major corporations want interest rates to rise as well: the growing problem of pension liability.

The $78 Billion Question Affecting Dividend Stocks TodayWhat low rates have done to pensions
For years, companies have been doing everything they can to minimize or eliminate their pension liabilities. Just last year, for instance, General Motors Company (NYSE:GM) and Verizon Communications Inc. (NYSE:VZ) took major steps toward outsourcing their liabilities to an insurance company, Prudential Financial Inc (NYSE:PRU), in order to get rid of the risk of long-lived pensioners beating the actuarial odds and draining corporate coffers to a greater extent than expected. Dozens of major companies have shuttered pension plans, forcing new employees to make do with 401(k) defined-contribution plans and the profit-sharing and matching contributions that employers have in many cases made on their behalf.

Yet low interest rates have caused problems for legacy pension plans and their funding status. As an article in The Wall Street Journal Monday noted, many companies with big pension plans will have to make substantial contributions this year in order to boost their funding levels. Ford Motor Company (NYSE:F) will divert $5 billion in profits to go toward its pension funds, sapping its ability to make capital expenditures to grow its business. Similarly, The Dow Chemical Company (NYSE:DOW) said that lower rates added $2.2 billion to its pension liabilities, forcing it to add an extra $250 million to $300 million in pension expenses this year to start on making up the difference.

Why do rates matter so much?
It may seem surprising that low interest rates have such a huge effect on pensions. But the simple explanation is that, as with ordinary people investing for a long-term financial goal, assumptions on what interest rates and rates of return will prevail over the decades can make huge differences to how much money you have to save in order to achieve the best results.

For pension funds, rate assumptions have to stretch far into the future — half a century or more for those companies that still let new employees participate. For brand-new workers, the time horizon is the longest, but the benefits are also the smallest. As workers stay longer in their careers and earn more benefits, what an employer needs to set aside gets a lot bigger — and it becomes much more sensitive to rate risk.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!