Looming Tax Changes Push DuPont to Boost Pension Payments

DuPont Co. will make larger payments into its pension than it had planned this year as part of a push to maximize tax deductions before a potential overhaul of U.S. corporate tax rules.

Pension contributions are tax deductible, therefore it is cost-effective to take a 35% deduction at today's rate instead doing it later, if rates fall. DuPont decided to pump extra money into its pension fund to deduct as much from its taxes as it could, according to a person familiar with the plan.

On May 2, Delaware-based DuPont said it would put $2.7 billion more than required to its defined benefit plans this year. Its plans had a $6.7 billion deficit at the end of 2016, meaning the value of assets didn't equal the value of the company's obligations.

DuPont is among the first to use the prospect of tax cuts as a spur to rush pension contributions. More companies are expected to take similar steps in coming months as the tax debate in Washington heats up, according to Alan Glickstein, a retirement consultant at Willis Towers Watson.

The debate could go in unexpected directions, and companies may need to move soon to protect their current deductions. "There's no guarantee that pension contributions would be even fully tax deductible under tax reform," he said.

The White House and Congress want to revamp the U.S. tax code by cutting rates and reducing its complexity. The initiative is in early stages, however, and there is already disagreement between various factions of the Republican Party, which controls Congress and the White House, about how to pay for tax cuts.

DuPont had expected to contribute only $230 million this year, but management decided to capitalize on low interest rates and borrow cheaply in the bond markets to boost that amount.

"We are partially using debt as a funding source given the favorable economic conditions to doing so, including the low interest environment, " said a DuPont spokesman.

The move also reverses DuPont's long-held policy of contributing the minimum required to its pensions.

Companies such as Verizon Communications Inc., General Motors Co., and International Paper Co. have also contributed more than required in recent months, but they did so to avoid paying higher insurance premiums to the Pension Benefit Guaranty Corp., the nation's pension insurer. Companies must pay a fee to the PBGC for every dollar their plans are underfunded. The average fee almost quadrupled between 2009 and 2016, according to a study by October Three Consulting LLC.

DuPont's case is also unique, because the company is merging with Dow Chemical Co. The deal is expected to close later this year, followed by a split into three units focused on agriculture, industrial materials and specialty products within three years.

Management will also have to split the pension obligation between the units, although they haven't determined the exact amounts. A smaller deficit would make the task easier, said the person with knowledge of the plan.

Pension obligations continue to be a burden to corporate balance sheets.

Although rising stock markets have helped boost pension asset values this year, falling interest rates have pushed up the value of plan obligations, offsetting asset gains.

S&P 1500 companies with defined benefit plans were only 83% funded at the end of April, the same as in March, according to consulting firm Mercer. The plans had a combined deficit of $392 billion, $1 billion higher than March, but $16 billion lower than the end of 2016.

As interest rates fall, the present-day value of future pension obligations rises.

Write to Vipal Monga at vipal.monga@wsj.com

(END) Dow Jones Newswires

May 09, 2017 17:56 ET (21:56 GMT)