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Corporate America takes aim at pension risk

ANALYSIS

NEW YORK -- Corporate America is finally ready to deal with a monkey on its back: massive pension obligations.

AT&T Inc on Friday said it plans to contribute a US$9.5 billion stake in its wireless business to its under-funded pension plan. Earlier this week, Verizon Communications Inc. moved to unload US$7.5 billion in pension obligations to insurer Prudential Financial Inc.

But by far the most common trend in corporate America is to offer lump-sum payouts to thousands of retirees now — these voluntary buyouts could cost companies millions of dollars upfront, but they eliminate the risk of obligations soaring out of control in the future.

General Motors Inc and Ford Motor Co. kicked off the trend earlier this year, and they have been joined this earnings season by companies ranging from Taco Bell and KFC owner Yum Brands Inc to tissue maker Kimberly-Clark Corp.

Companies “have been de-risking to manage the volatility of their (pension) assets,” said Ari Jacobs, senior partner and Global Retirement Solutions Leader at Aon Hewitt. “The logical next step for organizations is to move liability off the balance sheet.”

For years, plan sponsors have been squeezed by lower investment returns and higher costs for retiree benefits, which have forced companies to top up pension plans.

For instance, Sears Holdings Corp. in September contributed US$203 million to its pension plan to make it at least 80 percent funded.

In July, the average U.S. corporate pension was only 71.4 percent funded, according to BNY Mellon, the lowest level since the firm began tracking this information in December 2007.

By offering voluntary buyouts, companies expect to protect their balance sheets “from future volatility and future fluctuations,” said Rick Jones, a managing partner in Aon Hewitt's Retirement Consulting practice.

Kimberly-Clark recently notified about 10,000 former workers not yet receiving retirement benefits that they would be eligible for the lump sum distribution.

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