Heard Off the Street: Rising rates a silver lining for pension funds

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Investors who rely on interest income aren't the only beneficiaries of the sharp jump in interest rates since May 22, when Federal Reserve Board Chairman Ben Bernanke first signaled the central bank soon could begin curbing its $85 billion monthly purchases of federal securities. The run-up in rates since then means more pension plans are in a better position to pay the benefits they have promised to current and future retirees.

Depending on whom you talk to, the average U.S. corporate pension plan was 88 percent to 89.5 percent funded at the end of June. That means for every $1 in benefits they are obligated to pay to current and future retirees, the companies had 88 to 89.5 cents stashed away in their pension funds.

While rising interest rates cause anguish for consumers interested in purchasing a home, they bring smiles to the faces of pension fund managers.

Companies measure their pension obligations based on the yield generated by a low-risk portfolio of investment-grade corporate bonds. The lower rates are, the more pension liabilities grow. That's because low interest rates mean assets in the pension fund will not grow as fast, so there has to be more money to meet future obligations. Conversely, pension liabilities shrink when interest rates rise.

U.S. Steel chairman and CEO John P. Surma told shareholders in April that a 1 percentage point increase in interest rates would reduce the steelmaker's pension obligations -- estimated at $11.3 billion at year-end -- by about $1.4 billion. The increase would also reduce the company's annual pension costs by more than $50 million, he said.

Interest rates jumped enough during the quarter to cause pension fund liabilities to decline 6.1 percent, according to UBS Global Asset Management. The investment firm estimated the average corporate plan is 88 percent funded.

That's the same number Mercer came up with when it looked at the pension plans of companies in the S&P 1500. The consulting firm said pension funding improved from 74 percent at the end of 2012 to 88 percent at the end of last month. Pensions funds are the healthiest they have been since October 2008, Mercer said.

Mercer said 15 percent of the pension funds it examined had more than enough money to cover their liabilities at the end of June, up from only 4 percent at the end of last year. More than 37 percent could be fully funded if the blended corporate bond rate used to measure liabilities increased 1 more percentage point, Mercer said.

BNY Mellon estimates the average corporate pension plan was 89.5 percent funded in June, the healthiest figure since June 2011. Rising interest rates caused liabilities to fall 5 percent in June, more than offsetting a 1.6 percent drop in pension fund assets caused by the stock market's first losing month in 2013, BNY Mellon said.

U.S. Steel and eight other steel producers asked the U.S. International Trade Commission last week for relief from imports of tubing used in the oil and natural gas industries. The Tuesday petition cites imports of oil country tubular goods from India, Philippines, Saudi Arabia, South Korea, Taiwan, Thailand, Turkey, Ukraine and Vietnam.

The steelmakers allege that tube producers in the nine countries are selling their products in the U.S. market for less than they sell them in their home country or below their costs of production.

The steelmakers also claim producers from India and Turkey benefit from government subsidies, which means imports from those two countries could face additional duties if the U.S. steelmakers win their case.

Domestic and foreign steelmakers are all trying to tap the U.S. energy boom that has encouraged some to speculate about when the United States could achieve energy independence, an accomplishment that would have sounded far-fetched not that long ago. The enthusiasm has caused a spurt in tubular imports and prompted some U.S. producers to expand their capacity.

The nine countries cited in the complaint exported 1.8 million tons of oil country tubular goods to the United States last year, up from 840,313 tons in 2010, according to the American Iron and Steel Institute, an industry group representing North American steel producers.

Those 2012 imports are comparable to the amount of tubular goods for energy and other markets shipped by U.S. Steel in each of the last two years. The Pittsburgh steelmaker's $2.1 billion purchase of Lone Star Technologies in 2007 increased the company's tube capacity by 36 percent.

Over the last five years, the tube business has been the only one of U.S. Steel's three units that has been consistently profitable on an operating basis.

The company's North American sheet business generated operating losses in 2009 and 2010 while its European mills posted operating losses from 2009 through 2011.

Announcement of the trade complaint helped send U.S. Steel shares up 8 percent Tuesday. But the stock surrendered a little more than half of the gain over the remainder of the abbreviated week, closing Friday at $18.36, off 23 percent for the year.

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Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.


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