Assessing Pension Risk

What’s the Big Idea? 

The 2006 Pension Protection Act did exactly what its name implies – it protected employee pensions by penalizing companies that underfunded their pension plans. It offered employers some positive incentive, too, by raising the cap on the tax-deductable amount they could invest in their company’s pension plan. 

Around the same time, businesses began moving employee pensions to the main balance sheet, treating pension shortfalls like any other debt, rather than a relatively low priority. The amount invested in and owed to their pension plans became an increasingly significant element in calculating the cost of doing business. 

Jonathan Nus,  Senior Director of S&P Ratings Services, says that after 2006, pensions accounted for 20 to 30% of many businesses’ overall debt, in part because of the accounting changes and in part because this was a period of deleveraging – companies’ reducing their overall borrowing. 

[VIDEO] Jonathan Nus on how the S&P analyses pension credit risk

What’s the Significance? 

S&P treats pension plans as essential information in evaluating the overall health and risk-levels of a business. Specifically, says Nus, his team has noticed that companies are paying closer attention to how they fund pension plans – some using excess cash, others borrowing in a low-interest rate environment – and managing them in a more holistic way that protects the business (and its pensions) from market fluctuations. 

In short, businesses are getting smarter about pensions – learning how to maximize returns on their investment and make good on their promises to workers. This translates into greater employee loyalty, more competitive hiring, and a more stable corporate infrastructure. 

This is yet another of the many areas in which companies are acting on the understanding that what’s good for employees is good for business, a trend that offers hope for repairing some of the damage done to employee/employer relations by the successive waves of downsizing and significantly reduced benefits that have characterized the first decade of the millenium.