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Dead Cash? I Have An Idea.


Readers will have seen recent headlines regarding Dead Cash which refer to a recent tendency for Corporations to hoard rather than spend excess cash. Corporations, short of ideas, ought to consider making a contribution to their pension plan.

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In Sum

Ever stuck for ideas as to how to spend your excess cash? Me neither. Nice problem to have though.

It seems as though Corporations have been and are hoarding rather than spending their cash. Bank of Canada Governor Mark Carney has commented on this phenomenon. Stateside, U.S. policy makers are making noise as well.

Here’s an idea. Corporations ought to make a pension plan contribution.

Detail

According to the Towers Watson Pension index which is a broad pension fund financial health indicator, the pension funded ratio is ~56% for Canadian and ~61% for U.S. Corporations. Despite different measuring methodologies, the Mercer Consulting pension numbers corroborate the Towers Watson numbers. Funding levels in Canada ~83% and U.S. ~73%.

Corporate pension plans don’t have enough assets to pay (fund) pension liabilities.

To be sure, low interest rates are the primary driver of under-funded pension ratios. Low bond yields mean low pension discount rates; and the lower the discount rate, the more money a corporation must set aside to cover its pension promises.

The point is that there is plenty of room for corporations to make pension contributions. And contributions reduce unfunded pension liabilities thereby improving corporate balance sheets.

Stateside, U.S. pension in particular should consider making large contributions before existing fiscal cliff tax preferences that are now in support of retirement plans disappear as they get negotiated away by policy-makers fiscal cliff deal-making.

What would pension plans do with unexpected contributions?

Some of the contribution money will find its way into real estate investments which mean upgrades, improvements and jobs. Rent flows back into the pension plan to fund current pension payments.

Some of the contribution money will translate into Infrastructure investments which are long-term projects such as hospitals, airports, highways, utilities or (yet another) bridge … maybe even into public mass transit projects. Again, jobs. Again, income.

So, if you happen to run a Corporation, have excess cash and are struggling for ideas as to how to spend it, a contribution to your unfunded pension plan is a rare win-win.

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Next time? Risk Management.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
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