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Monday, July 14, 2014
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Published: Sunday, 12/13/2009

Pensions drop stocks, buy corporate bonds

BLOOMBERG

JC Penney Co., the third-largest U.S. department-store chain, is dumping stocks from its retirement plans and gradually boosting bonds to 100 percent of investments from 20 percent as federal requirements to plug pension gaps take effect.

The Plano, Texas-based retailer promised to "eliminate" uncertainty for shareholders caused by underfunded pensions and will shift some of the money into investment-grade bonds, increasing fixed-income assets to the highest level in the plan's history, company spokesman Darcie Brossart said.

JC Penney has plenty of company. General Motors Co. and Goodrich Corp. also have been buying debt as the United States pushes retirement pools to cut riskier assets after losses jeopardized some funds.

JPMorgan Chase & Co. says fixed-income holdings will rise 10 percent in the next few years, or about $40 billion of corporate debt. The new money is flowing into investment-grade bonds, which may be overheating after returning 20 percent this year as of Dec. 4, according to Cabot Money Management.

"We're seeing more plans leaning toward corporate bonds than has been the case historically," said Mark Ruloff, the director of asset allocation at consulting firm Watson Wyatt Worldwide Inc., which surveyed funds in August on their strategies.

"It's adding a new slate of buyers that weren't in the market before."

Pension funds are increasing allocations of investment-grade debt to the highest level since the 1970s, when federal rules created a "bias" toward equities, as the U.S. government mandates that plans set targets to fully fund worker obligations, Mr. Ruloff said.

Demand from retirement plans is competing with mutual funds and public pensions for corporate debt, even as prices may not be justified by the economic outlook or profits, said William Larkin, who oversees $500 million at Cabot Money Management.

The 20 percent return for investment-grade bonds this year, including reinvested interest, is the most for a comparable period since 1995, according to Merrill Lynch & Co. index data. Cash flowing into the market has allowed companies to borrow a record $1.19 trillion this year as of Dec. 4, Bloomberg data show.

Investment-grade securities are rated at least Baa3 at Moody's

Investors Service and BBB- by Standard & Poor's.

"I'm seeing a lot of ugly issuers out there," said Mr. Larkin, a money manager. "Someone's buying them, and they're very, very expensive."

Congress passed the Pension Protection Act of 2006 after losses in the auto and airline industries threatened to saddle the government-run Pension Benefit Guaranty Corp. with "significant" liabilities, according to JPMorgan.

Companies in the S&P 500 Index had about

$1.1 trillion of assets in their pensions at the end of 2008, compared with $1.4 trillion of liabilities, according to JPMorgan.

After last year's 38 percent plunge in the S&P 500 Index, the worst since 1937, the plans were underfunded by about 22 percent.

The 2006 law encourages managers to shift to corporate bonds in two ways.

The act discounts liabilities based on high-rated investment-grade debt, providing an incentive to put assets in similar investments.

The rules also require plans to ensure they are fully funded, providing benchmarks and penalties along the way and requiring plans be frozen if the assets fall below 60 percent of the value of future liabilities.

For JC Penney, with about 150,000 participants in its primary pension plan, the rules are a "game changer," Chief Financial Officer Robert Cavanaugh said.

Corporate plans traditionally allocated about 60 percent of their assets to equities, 30 percent to fixed-income securities, and 10 percent to alternatives such as private equity and real estate, said Joseph Rosalie, principal in the human capital practice at Deloitte Consulting LLP in New York.

JC Penney is aiming for a 75 percent fixed-income allocation by 2014 to 2017, depending on how quickly the stock market recovers from the recession, according to the company.

In June, the fund allocated 70 percent of its assets to equities, 20 percent to fixed-income and 10 percent to real estate.

With the S&P 500 up 22 percent this year by early December, corporate pension funds may resist switching, said Mr. Rosalie, who expects allocations to be split evenly between equities and bonds in coming years.

"When do you get off the blackjack table?" he said. "How do I walk away from equities when I know the market's got to return?"

Goodrich, the largest maker of aircraft landing gear, began shifting to investment-grade bonds from Treasuries this year, Chief Financial Officer Scott Kuechle said.

Its U.S. plan was underfunded by 29 percent as of last Dec. 31, with about $2.4 billion of assets covering $3.4 billion of expected liabilities.

"That was pretty well-timed in the beginning of this year," he said.



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