Retirees worry about $2 billion DuPont pension move
DuPont is borrowing $2 billion to close its pension gap.
The money will be used to make a voluntary contribution to its pension fund, the Wilmington-based chemical company insists.
But some of the 134,000 DuPont retirees who rely on such payments for daily living expenses charge DuPont is strengthening the fund before unloading its massive $24.7 billion obligation.
The retirees claim closing the shortfall is the first step toward de-risking, a complicated strategy companies use to reduce the financial dangers posed by underfunded pension liabilities. De-risking scenarios can vary from converting the pension to an insurance annuity or offering retirees a lump-sum payment in lieu of a monthly check.
Companies cannot transfer private pensions to an insurer unless the plan is fully funded.
"It increases the extent to which de-risking can take place," said Norman Stein, a professor of pension and employee benefits, said of DuPont's plan.
DuPont's underfunded pension plan has been an issue for the company ahead of its looming $130 billion merger with The Dow Chemical Co., expected to be completed later this year. The companies will combine to form DowDuPont before splitting into three separate, independent businesses.
Under federal law, DowDuPont would have to assume both companies' pension obligations. Neither Dow nor DuPont have disclosed which of the three spinoff companies would inherit either company's pension liability.
Retirees worry that one of the fledgling companies could collapse under the weight of the pension plans and declare bankruptcy. If one of the spinoffs becomes insolvent, the Pension Benefit Guarantee Corp. — an independent government agency created to provide a pension safety net — would become responsible for the pension obligation and retirees may receive less than they were promised.
"In a merger like this, de-risking gets DuPont off the hook and it gets the three new companies off the hook," said Dave Bartlett, a former DuPont manager who lives in Hockessin and retired in 2014.
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DuPont has only $16.7 billion of assets to meet its $24.8 billion obligation, according to Securities and Exchange Commission filings. Adding $2 billion and the interest it could earn would go a long way toward closing that gap.
Retirees and DuPont have sparred over the pension plan's exact funding level. The retirees contend that using traditional methods to measure a pension's health, DuPont's plan is only 67 percent funded. DuPont has challenged that number using MAP-21, a 2010 federal law that allows businesses to use a different method to calculate funding levels. Under MAP-21, DuPont claims its pension plan is 93 percent funded.
If a plan slips below 80 percent, the PBGC launches an investigation. DuPont is not currently under a PBGC investigation, but the agency has requested additional corporate financial and pension information from DuPont.
The company intends to borrow the $2 billion by offering three-year, fixed-rate debt notes. DuPont will use proceeds from those bonds to make a voluntary contribution to its pension plan. DuPont may not use all of the money to shore up the pension gap, according to Dan Turner, a company spokesman.
"We are also evaluating potential additional discretionary contributions to the U.S. pension plan that could result in a significant reduction to the plan's underfunded benefit obligation," Turner said.
Several factors could influence how much of the debt DuPont puts into the pension fund, Turner said. Those factors include market conditions, access to capital markets and tax deduction limits. He said the company will publicly announce the contribution once it is determined.
Separately, DuPont will make a required $230 million payment to its pension fund later this year. The money for that contribution will not come from the debt offering.
The debt bonds may contain a clue as to which spinoff receives the pension liability. Lenders can redeem the notes when DowDuPont separates its agriculture and specialty products businesses into independent businesses. Those businesses will be based in Delaware.
However, the bonds cannot be redeemed through the separation of the performance materials unit, which will be headquartered in Dow's hometown of Midland, Michigan.
'I want them to keep the promise they made'
DuPont has sought to reduce its pension obligation over the last year. In the fall, it offered pension buyouts to 18,000 retirees whose plans had vested. Retirees had the option to trade their future pensions for a lump sum or small monthly annuity instead of waiting until they reached 62 to collect a traditional pension.
The company also stopped contributing to active employees' pension plans, a move that will impact the retirement of 13,000 workers. Employees will stop accruing benefits sometime next year. DuPont said the change will reduce its long-term employee benefit obligation by $527 million and eliminate the $50 million it pays annually to maintain the plan.
Retirees said they will be vulnerable if DuPont de-risks the pension. Bartlett said his bonuses and salary were less than comparable positions at other companies, but DuPont offered a larger pension than competitors.
"I sacrificed on the front end so that I wouldn't have to worry in my retirement," Bartlett said. "Now I want them to keep the promise they made."
Bartlett has worried that DuPont would renege on that promise. He has feared that if DuPont walks away from its pension obligation, it would result in a significant lifestyle change, he said.
"We would have to sell some of our assets and my wife and I would both go back to work," he said.
Tommy Thompson, of Orange, Texas, retired in 2008 after 34 years with the company. Thompson worries the changes could come before some retirees have had a chance to prepare.
"I feel like we traveling a million miles an hour and the brick wall is only a few feet away," he said.
De-risking has become increasingly popular with large corporations. In the past few years, Verizon, General Motors, Ford, Motorola and Bristol-Myers Squibb have offloaded their pension liability through a de-risking transaction. Together, those pension funds were worth more than $100 billion and supported hundreds of thousands of workers, retirees and beneficiaries.
In fact, Verizon workers filed a 2012 lawsuit against the company alleging its transfer of a $7.4 billion pension obligation to insurer Prudential was corporate misconduct. The lawsuit was dismissed twice.
Lobbying groups, including the AARP, the National Retiree Legislative Network and the Pension Rights Center, have raised a number of concerns about both lump sum and annuity-based de-risking strategies.
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Lump sums are problematic, especially if a retiree lives longer than expected. About 21 percent of retirees who opted for a lump sum over a pension plan said they already spent it all, according to a poll by New York insurer MetLife. The February 2017 poll also found that 35 percent of those who still have some of the money worry it will run out.
"If they are being offered a lump sum, they should be very careful about what that means," Stein said of retirees.
Insurance company annuities create their own challenges, however. An insurance annuity is not safeguarded by either the PBGC or the Employee Retirement Income Security Act of 1974 or ERISA. If an insurer becomes insolvent, the only protection is a state insurance guaranty fund, which only covers between $100,000 and $500,000 in losses.
"The retirees are going into a more risky environment with annuity contracts," said Paul Secunda, who teaches employee benefits law at Marquette University Law School. "I understand the retirees' concerns."
Stein, however, said employees may actually be more secure choosing an insurance annuity over a pension payment.
"If your benefits are transferred to a top-ranked insurer with a strong ability to pay, I don't see that as a greater risk to employees than an underfunded pension plan," he said. "I know employees don't like change, but I don't see how people can say you are worse off after de-risking to an insurance company."
Secunda said retirees should be vigilant, looking to see if DuPont makes any move that suggests they could de-risk the pension plan.
"They should need to be on top of this," he said.
Contact Jeff Mordock at (302) 324-2786, on Twitter @JeffMordockTNJ or jmordock@delawareonline.com.