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11 May 2016

Borrowing money at low rates to fund pension deficits could enhance shareholder value

Photo: Rohit MathurThe majority of U.S. corporations are facing pension deficits, which pose a significant risk to their employees and shareholders. The enduring low interest rate environment coupled with increasing annual variable Pension Benefit Guaranty Corp. premiums present companies with an attractive potential opportunity to borrow money and contribute the proceeds to their pension plan to reduce pension deficits.

“Borrowing to fund pension deficits provides plan sponsors with a way to replace variable and potentially volatile debt obligation—the underfunded pension—with a known, certain amount of debt at a fixed funding cost,” says Rohit Mathur, head of Global Product & Market Solutions, Pension & Structured Solutions at Prudential Retirement. “A range of plan sponsors—with small, large, frozen or ongoing plans—could benefit from a ‘borrow-to-fund’ strategy.”

This strategy reduces variable premiums to the Pension Benefit Guaranty Corp., premiums that are expected to rise to 4.1 percent of unfunded liability in 20191. The economic benefit of this approach is also driven by lower after-tax debt service compared to annual plan contributions, and acceleration of tax deduction on pension contributions.

"We believe borrowing to fund is an important first step to consider in the context of an overall risk-reduction strategy," says Mathur, "and should be leveraged based on a plan sponsor’s end goal for pension de-risking.”

A recent annual survey from CFO Research and Prudential underscores the importance of funding pension plans and reveals many companies are increasing contributions to close their funding gaps. Sixty-four percent of survey respondents report that their companies have either already increased contributions (15 percent) or are likely to do so within two years (49 percent).

Interested in learning more about the “borrow-to-fund” strategy? Read Prudential’s Issue Brief, "Borrowing to Fund Pensions Could Enhance Shareholder Value."

Want to speak with Rohit? Contact Josh Stoffregen


Josh Stoffregen
phone: 973-802-3996
mobile: 973-204-2540
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