Moody’s: Jump in Corporate Pension Liabilities Is Partly Cyclical

Corporate pension liabilities have spiked significantly since 2013, and a report released last week by Moody’s explores the reasons why.

In the report, Moody’s says the increased liabilities can be attributed to a number of factors, but the spike is at least partly cyclical and is expected to ease gradually going forward.

From Moody’s:

Corporate pension liabilities have increased significantly in the past year, often as a result of lower interest rates and the resulting lower discount rates used to calculate the present value of pension obligations, according to Moody’s Investors Service. In the US, for example, the ten companies for which Moody’s makes the largest pension adjustments saw the aggregate adjustment increase by 36% to USD150 billion between 2013 and 2014, which also reflected other factors, such as a revision of mortality tables. The rating agency expects the negative effect of very low interest rates to subside gradually as rates rise in the US and Europe over the next several years.

[…]

“Our central macroeconomic scenario forecasts a gradual rise in interest rates, somewhat earlier and faster in the US than in Europe. Should interest rates not rise in the coming one to two years, as is anticipated under our central macroeconomic scenario, there may be a more protracted burden of pension liabilities that we may then view as being a more permanent feature of a company’s capital structure”, says Richard Morawetz, a Moody’s Group Credit Officer for the Corporate Finance Group and author of the report.

[…]

Except for a few instances where companies faced extraordinarily large pension challenges, there is little history of reversible swings in pension deficits being the primary cause of downgrades of investment-grade companies. While the time frame varies in different countries, corporates generally have a multi-year period to remedy funding shortfalls. Investment-grade companies, to a greater degree than speculative-grade companies, have discretionary cash outlays with some ability to make compensatory adjustments to increase pension funding if needed.

The report, titled “Inflated Pension Liabilities Expected to Ease Gradually as Interest Rates Rise”, can be accessed here [subscribers only].

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