Low rates force companies to pour cash into pensions

The Wall Street Journal reported that low interest rates are forcing companies to pour cash into their pensions rather than invest in their core business.

This report confirms the Retirement Plan Death Spiral that your humble blogger first discussed many months ago when I first looked at the headwinds created by the central banks' low interest rate policies.  

Under the Retirement Plan Death Spiral, the low interest rate policies being pursued by central banks trigger a self-reinforcing downward spiral in the economy.  

Companies offset the lack of earnings on pension fund assets by diverting funds needed for growth and reinvestment to their pension funds.  This depresses demand in the economy which results in further downward pressure on pension fund earnings.  

Downward pressure that companies then have to offset by diverting more capital needed for reinvestment and growth to their pension plans.

Of course, the Retirement Plan Death Spiral could be stopped, but this would require that the central banks acknowledge that their low interest rate policies aren't working and raising interest rates to at least the 2% level recommended as an absolute minimum by Walter Bagehot, the father of modern central banking.

Ford Motor Co. expects to spend $5 billion this year shoring up its pension funds, almost as much as the auto maker spent last year building plants, buying equipment and developing new cars. 

The nation's second-largest auto maker is one of a who's who of U.S. companies pouring cash into pension plans now being battered by record low interest rates. 

 Verizon Communications Inc.contributed $1.7 billion to its pension plan in the fourth quarter and—highlighting companies' sensitivity to this issue—Boeing Co. now reports "core earnings" to separate out pension expenses. 

"It is one of the top issues that companies are dealing with now," said Michael Moran, pension strategist at investment adviser Goldman Sachs Asset Management. 

The drain on corporate cash is a side effect of the U.S. monetary policy aimed at encouraging borrowing to stimulate the economy. Companies are required to calculate the present value of the future pension liabilities by using a so-called discount rate, based on corporate bond yields. As those rates fall, the liabilities rise.... 

Today, many of the companies contributing to the pensions are struggling with the costs but don't offer defined benefit plans to new workers....

Andrew Liveris, chief executive of Dow Chemical Co., which posted a loss of $716 million for the fourth quarter, said the company faces a "massive pension headwind" because of the change in the discount rate that added $2.2 billion to its pension liability. 

Pension expense this year is going to rise between $250 million and $300 million. 

"Other companies have got it, and so we're not alone, but clearly those are big numbers for us," Mr. Liveris said.