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WSJ Your Money Briefing
Corporate Pensions Could Suffer From Lower Interest Rates
00:05:25
Wall Street Journal Heard on the Street columnist Lauren Silva Laughlin explains how an expected interest rate reduction by the Federal Reserve could negatively impact corporate pension funds.
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A
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- [00:36]
B
Here's your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. Sure, if the Fed lowers interest rates, big banks will take a revenue hit, but so will corporate pensions and that hits home. We'll check in with a Wall Street Journal columnist in a moment to go over some details. First, some money and market news that you should know. Good news if you're a natural gas customer. The prices that traders set that determines future pricing are at their lowest level since July of 1999. Prices typically rise in the summer as demand for electricity spikes to run air conditioners and supply disruptions from tropical storms. They drive natural gas prices up as well. But the people who set futures prices are confident that the heat wave that's gripping the Northeast and Midwest is going to ease at the end of July. Prices also rose after Hurricane Barry forced some offshore platforms in the Gulf of Mexico to temporarily shut down. But but that disruption was partly offset by power outages caused by Barry, as well as the blackout that hit parts of New York City over the weekend. The U.S. energy Information Administration says that the August natural gas output would increase year over year in each of seven major regions around the country, and that would keep the country on pace to top 2018's production record. And Miami Dolphins owner Stephen Ross and his wife, the jewelry designer Kara Ross, have listed their New York City penthouse that overlooks Central park for $75 million. The five bedroom apartment spans 8,500 square feet and sits atop the Time Warner center at Columbus Circle. There's also a large dining room with marble floors, a wood paneled den with a fireplace, a library with upholstered walls and a 42 foot long living room with floor to ceiling windows. And just so nobody takes up too much space in the morning, the master suite has two marble bathrooms and two dressing rooms. Another bedroom is used as a gym. Another holds a golf simulator. Now they're selling the unit, by the way, to move to Hudson Yards on Manhattan's west side, which is the largest private real estate development in the country. We've told you on a few occasions here on your Money Briefing how the big banks stand to lose revenue if the Federal Reserve works or to lower interest rates? Well, it turns out the effects of lower rates are likely to extend to US Corporations and specifically corporate pension funds. I heard on the street, columnist Lauren Silva Laughlin is on the line with us to explain. So, Lauren, corporate pension funds, they had a banner year in 2018. High interest rates and the new tax law at the time really helped that out. But now the landscape has changed.
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C
As interest rates fall, the companies have to sort of recalculate the money that they owe their pensioners, and little tweaks in the interest rate can actually make a big difference. So if a company is expecting the interest rate to be 4 or 5%, that's a lot different than what their liabilities look like. If it's 2 or 3%, say. So as the interest rate has fallen, the liabilities that these companies owe or they carry on their balance sheets has grown, and that's really bad news for some of them.
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B
And in terms of higher tax rates, the companies at one time really had an incentive to contribute to their pension funds.
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C
That's right. So last year, they had until the late fall to essentially give money into their pension funds and have it be tax deductible at a higher rate. So a lot of them rushed to put money in. Then, as any individual would say who is contributing to their own pension tax deductible at a lower rate, you're going to put in less money. And that's what they've done this year. So really, it's been sort of a double whammy for pension funds. They have falling interest rates, which is increasing their liabilities. They're putting less money in, which is decreasing their assets, and this has caused an imbalance.
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B
Now, just to go back for a moment to 2018, investors in corporations should pay close attention to how generous pension contributions were, because that could impact the earnings reports coming out this year.
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C
Absolutely. So it varies pretty widely among companies. But what ends up happening is they have certain funding obligations, and once they decide they have to pay into their pension funds, then that can be ultimately become an earnings hit.
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B
Now, we've seen bond yields come down and actual bond prices rise as a result. Can you explain how that impacts corporate pensions?
- [05:04]
C
Yes. So as bond yield fall, the asset prices rise. And this, in theory, should be sort of a netting effect. And it does to some extent. The problem is the proportion of a portfolio that's invested in bonds is not 100%. So that discount rate, as it's called, gets applied to that portfolio, gets applied to the entire portfolio, whether it's bonds or equities. So that net effect of rising bond prices only mitigates a portion of the portfolio price, not the entire portfolio price. And as a result, you have this sort of falling values outweighing the rising values.
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B
All right. That's Wall Street Journal heard on the Street. Columnist Lauren Silva Laughlin with us on the line. Lauren, thanks for coming on the show and making it easier to understand.
- [05:51]
C
Thank you very much.
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B
And that's your money briefing. I'm JR Whalen in New York for
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A
the Wall Street Journal deal replaces fragmented payroll vendors with one global system. No third parties. Hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit d e e l.com WSJ.