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Dormant corporate cash should plug pension holes

Corporate America ought to get real about pensions, too. As lawmakers wrestle over how to fix the nation's ailing retirement plans, AT&T and Verizon took a whopping $17.2-billion (U.S.) of charges related to theirs in the fourth quarter. Return expectations remain too rosy and deficits are rising. The private sector isn't leading the way on this issue.

The two telecom giants are among the leaders in companies saddled with pressured defined-benefit plans. Four years of ultra-low interest rates have forced them to use a lower discount rate when calculating the net present value of long-term retirement obligations. That creates ever-bigger holes. The largest 100 U.S. pension funds were short by over $400-billion in 2012, up a fifth from the year before and the largest year-end gap since consulting firm Milliman started keeping track in 2000.

It's tempting to shrug off such red ink as a temporary problem. Once the Federal Reserve tightens monetary policy, as it eventually must, the gaps should shrink. Such thinking informed a law passed last year allowing companies to contribute potentially $45-billion less to their funds this year than they otherwise would have, according to estimates by Credit Suisse. General Electric, for example, said it would inject only $500-million into its pension plan for 2012 and 2013 instead of the $3-billion originally intended.

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The wait-it-out approach is hardly an exemplary model. For one, the Fed squeeze could last for years. If companies keep contributing less, their pension assets will need to earn more. Forecasts are already unrealistic. Some are recalibrating, but only at the margins. AT&T cut its expected returns to 7.75 per cent from 8.25 per cent, a still unrealistic hurdle in a zero-return world. It could spur an unhealthy use of leverage to supercharge returns on low-yielding fixed-income securities or an allocation of too much capital to riskier investments.

Plugging pension holes would be a better use of cash than allowing it to languish on balance sheets. Such contributions are also tax deductible. Voters may be resigned to politicians evading tough decisions on paying for future liabilities. Investors, however, can expect more from chief executives and boards of directors.

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