pension benefit guaranty corporation

When is Cheddar more than cheese, or water more than wet?

When it’s in a pension fund, of course.

As companies struggle to close the gaps between what they owe to their pension funds and what they think they can pay, they are in some cases turning to unusual assets that they hope will make up part of the difference.

For example, Dairy Crest, one of Britain’s biggest producers of dairy products, said Friday that it would add £60 million, or $92 million, worth of Cheddar cheese to its pension fund. That is about 20,000 tons of cheese, or 40 percent of its current maturing cheese inventory, the company said. (It will be constantly replaced as it ages.)

Diageo, the maker of Johnnie Walker whisky, moved two million barrels of maturing whisky at its distilleries in Scotland to its pension fund in 2010.

In the United States, the Pension Benefit Guaranty Corporation, which takes over both the assets and the liabilities of failing pension plans, encounters all kinds of peculiar assets. It has taken possession of water rights in the Mojave Desert, diamonds, oil wells, a hog-slaughtering facility, a restaurant, a hyperbaric chamber, a brewery in Philadelphia, a lien on a terminal at Kennedy International Airport and a stake in a nuclear fuel-reconditioning partnership.

Moving physical assets into pension plans allows companies to avoid having to come up with the cash they would otherwise need to keep their plans flush.

In Dairy Crest’s case, its pension deficit was £84 million as of Sept. 30, the last time the company reported the figure. The company also said that it had made a one-time immediate payment to the pension fund of £40 million, in addition to an annual payment of £20 million.

Hard-to-value assets could hold a certain appeal: a plan actuary could assert that diamonds, for example, will pay higher returns than bonds.

“The higher the assumed rate of return, the lower the requirement on the employer to fund the plan in full,” said Andrew Frank Thompson, a finance professor at the University of Northern Iowa College of Business. “If I’m assuming a 20 percent annual return, I don’t have to put as much in. So employers like the idea of investing in exotic types of things.”

That could include trees. United States Steel, based in Pittsburgh, transferred about 170,000 acres of Alabama timberland to its workers’ pension fund several years ago, to help plug a shortfall. The timberland sprawls over five counties near Birmingham and was estimated to be worth about $100 million at the time of the transfer. U.S. Steel acquired it in 1907, when it bought the Tennessee Coal, Iron and Railroad Company.

Large, in-kind pension contributions by companies must be vetted and approved by the Labor Department. It is not known whether the department would approve big batches of cheese, because no one in this country has tried it.

States are not bound by those rules, and Alabama has stocked its pension system with 11 golf courses, all within the state, along with an array of hotels and spas. The investments have sometimes drawn criticism for not returning as much as publicly traded investments, but the system’s chief executive, David Bronner, says building resorts and golf courses also improves the standard of living in Alabama.

“If we didn’t do it here, there would be no new buildings in Alabama, there would be no hotels in Alabama, there would be no spas in Alabama, there would be no golf courses in Alabama. You’d still be the Alabama of the ’70s,” he told state pension trustees at a board meeting last year.

Company pension plans in the United States are guaranteed by the federal government, and when a company goes bankrupt, the pension guaranty uses all the pension assets it acquires from bankrupt companies to help cover the cost of the benefits it pays retirees. Its officials obviously find it much easier to work with publicly traded stocks and bonds than with, say, water rights in a desert.

“The main issue remains as to how funds can be deployed to this activity when the P.B.G.C. is running a deficit of $23 billion,” said Mr. Thompson, who has studied the pension insurance program’s finances.

Mr. Thompson said assets like breweries and diamonds were ill suited to paying pensions because they were illiquid and hard to set a value to.

“From an actuarial standpoint, those assets would not be suitable,” he said. “When you’re reserving, you want assets that are marketable.”

Article source: http://www.nytimes.com/2013/04/20/business/global/company-plugs-pension-hole-with-cheese.html?partner=rss&emc=rss

Political Memo: After Snips to Budget, a Thicket Looms

With time growing short before an Aug. 2 deadline to raise the federal debt limit, Republican and Democratic lawmakers meeting with Mr. Biden behind closed doors are just beginning to weigh the big fiscal trade-offs necessary for a compromise that could clear the way for a Congressional vote.

An accelerated schedule of meetings for next week will test whether the six members of the House and Senate talking with the White House are willing to entertain the serious political concessions and to make the hard choices needed to cut a deal in time.

In the colorful phrasing of Mr. Biden, the moment has arrived to find out who is willing to trade their side’s bicycle for the other side’s golf clubs.

“The really tough stuff that is left are the big-ticket items,” Mr. Biden said Thursday at the conclusion of the week’s third bargaining session, meetings that took lawmakers and administration officials to every corner of the federal budget in a search for consensus on ways to save federal dollars.

Lawmakers and aides say the negotiators quickly gobbled up low-hanging fruit like trimming agriculture subsidies and selling more of the telecommunications spectrum to generate revenue. There is a general consensus that federal workers are going to have to contribute more to their pensions, though the details are still to be determined. The Pension Benefit Guaranty Corporation will collect higher fees from stable companies, and some idle federal property could be up for sale.

But those actions are not going to produce anywhere near the $2 trillion or more in savings that both sides agree is the level required to win a debt limit increase while putting the government on course to save $4 trillion over the next decade — a goal set by Mr. Biden.

To get there, negotiators are going to have to make some excruciating choices about federal health care and safety-net programs, as well as the tax structure. At the same time, they need to reach a deal that not only can be sold to a bipartisan majority in the House and Senate, but also is credible enough to assure investors worldwide that Washington is getting serious about taking care of its financial health.

Representative Chris Van Hollen of Maryland, the senior Democrat on the Budget Committee and a participant in the talks, said one reason for setting three-hour meetings four times next week is to gauge whether he and his fellow budget bargainers can ever come to terms.

“We are picking up the pace in a big way, recognizing that we’ve got to determine whether we can reach agreement in principle or recognize that we are not able to bridge our differences,” he said.

Watching the clock, Senator Harry Reid, the Nevada Democrat and majority leader, on Friday called on the negotiators to keep working through the Fourth of July recess if necessary.

To Democrats, a major impediment is the Republican position against relying on any significant new revenues as part of the deal, insisting that most of the $2 trillion or more come from cuts in federal spending — although not from Pentagon spending, a major potential source of savings.

Democrats say they will never be able to sell a compromise without some new revenue to their colleagues in the House and Senate. They say the most affluent Americans should contribute to the debt limit deal through new taxes on hedge fund operators or by phasing out tax deductions for those at the highest levels of earnings.

But Representative Eric Cantor of Virginia, the majority leader who is representing House Republicans in the talks, on Thursday reiterated the deep Republican opposition to higher taxes.

“Our side will not support any attempt to raise the debt ceiling that is not accompanied by the kinds of cuts necessary or reforms necessary,” he said. “Nor will we support an attempt to raise the debt limit that raises people’s taxes. That, we don’t want to do.”

Republicans want to see Democrats embrace more changes in Medicare and Medicaid, the federal health programs for older Americans and the poor.

Democrats have so far pushed for modest changes like allowing the government to negotiate prescription prices with drug companies and to require drug industry rebates for people eligible for both Medicare and Medicaid — a proposal that could potentially generate tens of billions of dollars. But Democrats will not support any major Medicare overhaul, saying they believe that they have the political high ground on the issue at the moment.

To get a deal, lawmakers on both sides are going to have to bend considerably and back unpopular positions. They are then going to have to sell the plan to their rank and file on the grounds that they need to avert the economic disarray that could result from a failure to raise the debt ceiling.

Both sides say that all those in the talks want to reach a compromise. “There is no principal in that room that doesn’t want to get agreement,” Mr. Biden said.

Yet that is no guarantee that the deal will be done.

“I’m confident,” said Representative James E. Clyburn of South Carolina, another top Democrat in the talks. “But I’ve been confident before and come up short.”

Article source: http://feeds.nytimes.com/click.phdo?i=c5a1a9c52f2f7a075b359f8fc8d08edd

Plugging Pension Holes With Products

Political Memo: After Snips to Budget, a Thicket Looms

Recent News

Partners