Employers saddled with swelling pension obligations and highergovernment fees on those liabilities are finding some relief in thecorporate debt market.

Delta Air Lines, Verizon Communications and FedEx have issuedmore than $14 billion in bonds this year in which some proceedswere flagged for bolstering their retirement programs, according todata compiled by Bloomberg. Last year, General Motors did the same,and International Paper had a debt sale as part of a plan to fundexpenses including pension costs.

Companies are looking to avoid the higher premiums required onliabilities by the Pension Benefit Guaranty Corp., a governmentagency that acts as a backstop when plans fail. The cost perthousand dollars of unfunded benefits has more than tripled inrecent years, making it more attractive for employers to shift riskto bondholders.

“The PBGC premiums are a constant and nagging concern,” RichardMcEvoy, the U.S. leader of the financial strategy group atconsulting firm Mercer, said in an interview. Issuing bonds tobolster pensions “is a very clearly good trade.”

In 2016, companies voluntarily added about $40 billion topensions, the first year since 2012 that the figure increased,according to an estimate by Goldman Sachs Group Inc. based on ananalysis of the S&P 500 index. Still, corporate America had ashortfall of more than $300 billion on pensions at the end ofDecember, according to a review of 100 large plans by Milliman, theprovider of actuarial products.

By filling the gaps, companies can also make it easier totransfer obligations to an insurer looking to add assets undermanagement. Prudential Financial, MetLife and Massachusetts MutualLife Insurance Co. have been winning deals in the growing pensionrisk transfer market. Athene Holding, the annuity seller with tiesto Apollo Global Management, is also seeking such transactions.There were more than $13 billion of pension buyout deals in2016, according to industry group Limra, and the volume oftransactions has been climbing in recent years.

Companies may also use debt issuance as a path toward offeringlump-sum payments to retirees, or even to allocate assets into morestable investments. Mercer said it may make sense to act soon tofill funding gaps, because potential changes in tax law underPresident Donald Trump could erode some of the advantages.

Using debt is more attractive for high-grade borrowers whobenefit from lower costs in the corporate bond market.Delta, which carries the lowest investment-grade credit ratingfrom Moody's Investors Service, was able to issue five-year debt ata coupon of 3.625%. Verizon, rated two steps higher, pricedfive-year notes at 3.125%. By the end of the decade, companies willlikely be paying the PBGC more than 4% on the underfunded portionsof pension plans.

'Attractive Economics'

“A key economic benefit of funding the pension plan with debt isreducing the unfunded liability, which in turn reduces the risingPBGC variable-rate premiums we have to pay,” Bob Varettoni, aspokesman for Verizon, said by email. GM's Tom Henderson said thatreducing pension risks with bond proceeds offered “moderatelyattractive economics.”

After years of low bond yields sapped returns on assets, pensionmanagers have learned not to count on a quick return to historicalaverages, or to get too excited about the rise in rates in thelatter part of 2016. The funded status of pensions held bycompanies in the S&P 1500 Index was just 82% at the end of2016, the same as 12 months earlier, according to a report byMercer.

“Rising rates alone are not going to close the gap. Some amountof funding has to happen,” said Ajay Khorana, global head ofCitigroup's financial strategy and solutions group. “Money isflowing into fixed income, and companies will take advantage ofit.”

Pensions were stung in the financial crisis as markets plunged.After that, near-record low interest added to the pain as the fundswere stuck with lower-than-expected returns on bonds. Verizon stillhad more than $20 billion in projected remaining obligations at theend of 2016, and its plan was underfunded by about $6.4billion.

“People have just become tired of the pension plan being such asignificant issue to their overall corporation,” said Greg Calnon,managing director at Goldman Sachs Asset Management.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.