NEW YORK – The swift rise in U.S. bond yields in February may be whipsawing some stock market portfolios but it may bring relief to corporate America’s largest pension plans.
For pension funds, rising interest rates can generate more investment income to cover their obligations to pay pensioners.
The prolonged low-rate, low-volatility environment since the 2008 financial crisis posed a challenge for pension fund managers. Not only were returns on bonds low, but the market value of their liabilities was rising, reducing the so-called funding ratio of pension funds.
Rising bond yields can be good for pension plans because it can lower the required annual cash infusions while still meeting their liabilities, said Michael Schlachter, a partner at pension fund advisor Mercer Investment Consulting in Boulder, Colorado.
The estimated aggregate funding status of pension plans sponsored by S&P 1500 index companies increased by 3 percent in January to 87 percent at the end of the month, as a result of both an increase in discount rates on liabilities, tied to bond yields, and a rise in equity markets to a new record, according to Mercer.
Last week’s volatile stock markets worldwide were accompanied by surging bond yields though which worked in favor of pension funds.
Across America’s largest 1,000 companies, 491 offer defined-benefit plans which pay a fixed pension, and these plans have most of their assets in fixed income, followed by equities, then other assets like private equity and cash, according to Willis Towers Watson.
As annual reports are published throughout February, the average funded status of the plans, or the gap between what corporations owe for their pension plans versus what they have set aside for the obligation, will likely show the first year-over-year increase in four years.
“Continued rises in interest rates, equity values, and contributions could further augment funded ratios in 2018,” said Michael Moran, chief pension strategist at Goldman Sachs Asset Management in New York.
Rising bond yields will free up companies to contribute less to pension plans, which are helped most by the rise in yields of U.S. Treasury debt with a long maturity. Last year’s “flattening” in the yield curve, in which long-dated yields fell faster than short-term yields, had hurt some pension plans.
Last week, U.S. defense company Lockheed Martin Corporation reported that its pension fund for employees nearly tripled its return on assets in 2017 from the year prior, but the plan’s funded status decreased over that same period from 69.7 percent to 68 percent. Also last week, $62.7 billion snack conglomerate Mondelez International reported that its pension plan, which was overfunded in 2016 at 100.4 percent, was in 2017 down to 97.4 percent. Greif Inc, an industrial packaging firm, said the funded status for its U.S. pensions declined from 70.7 percent to 69.3 percent.
All told, it’s not just the swift rise in bond yields that is projected to help corporate pension funds.
Spurred by President Donald Trump’s tax overhaul, corporate pension plan sponsors across the United States upped their contributions hoping to take advantage of the old 35 percent tax rate, which is deductible from a tax bill, before they are forced to use the 21 percent rate in September.
United Parcel Service increased its pension contribution by $7.3 billion in 2017 over an expected $2.3 billion at the start of the year. General Motors, which manages the largest corporate pension plan in the United States contributed $3 billion last year.
In 2017, Boeing added $3.5 billion, Delta added $3.2 billion, and Verizon added $3.4 billion in addition to the $600 million it had already pledged. Lockheed Martin plans to add $5 billion in 2018.
Reporting by Kate Duguid;
Gm Korea Seeks To Trim Benefits Wages Internal Letter
SEOUL – General Motors Co will propose a base wage freeze and no bonuses this year along with a suspension of some worker benefits at its money-losing South Korean unit to cut costs, according to an internal letter that Reuters reviewed on Friday.
GM is bracing for a major showdown with its South Korean unionised workers, after the U.S. automaker announced last week it would shut a plant by May in the city of Gunsan, in southwest South Korea, and decide the future of its remaining three plants in the country within weeks.
GM executives have complained that South Korea’s relatively high wages and unyielding unions have contributed to its problems in the country.
To “improve the manufacturing competitiveness of GM Korea,” GM will propose freezing base wages this year and limit future wage increases below inflation, the letter said.
“It is impossible to pay 2018 bonuses/one-time payments in 2018,” GM said in the letter, sent to team leaders, laying out proposals for this year’s wage talks with the union.
GM Korea has paid about 10 million won ($9,285.83) in bonuses to each worker almost every year, company officials have said.
The proposal includes suspending benefits, such as school tuition for employees’ children, gold medals and travel expenses for long-serving workers, and free lunches.
GM has told its South Korean employees the company should trim benefits worth a combined 300 billion won, two sources told Reuters. One of the sources said GM has also asked employees to curb use of corporate cards.
A GM Korea spokesman declined to comment, while a union spokeswoman said it has not officially received the proposal.
Meanwhile, GM on Friday dropped a request to use its South Korean factory in Bupyeong as collateral for debt, a person with direct knowledge of the matter told Reuters.
At around 5 percent interest, GM headquarters in Detroit has lent its South Korean unit nearly 3 trillion won, out of which 700 billion won comes due at the end of this month.
At a board meeting of its South Korean unit, GM also agreed to grant temporary relief in repaying the 700 billion won debt until the government completes its due diligence of the unit, the person with direct knowledge of the matter said.
South Korea said on Thursday it plans to quickly conduct due diligence on GM’s S.Korean operations and would discuss whether the government would provide financial support to the company.
This came after GM agreed to play “a responsible role” in normalising its South Korean operations while other stakeholders also “share the pain.”
“GM told board members that there is progress with its talks with the government, but little progress with talks with its labour union, which is a problem,” said the person with direct knowledge of the matter.
GM has been seeking concessions from the South Korean union, and government support to engineer a turnaround.
South Korea was once a major export base for GM, but saw slumping sales in recent years as GM scrapped its Chevy brand in Europe.
The ruling party on Friday urged GM to come up with a “viable, long-term turnaround plan” for its South Korean operations.
Reporting by Hyunjoo Jin; Additional reporting by Ju-min Park and Heekyong Yang;
Asia Shares Rebound As Fidgety Us Rate Fears Shift Again
SYDNEY – Asian shares rebounded on Friday as comments from a Federal Reserve official eased worries about faster rate rises in the United States, while the dollar ticked higher as investors dipped their toes back into riskier assets.
Indications were mixed for other global equity markets, with E-Mini futures for the S&P 500 up 0.3 percent but London’s FTSE futures slipping 0.2 percent.
Financial markets have fluctuated wildly this month as investors fretted about how fast the Fed might raise rates in the wake of data showing a pick up in U.S. inflation.
Even though broader U.S. price pressures still appear modest for now, markets are fully pricing in three rate hikes this year, one more than was seen just a few months ago. Some analysts even expect four.
That in turn has stoked anxiety that many central banks will start to tighten policy and raise borrowing costs, hurting corporate earnings and clouding the outlook for what had been expected to be another solid year of global economic growth.
MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 0.9 percent on Friday to add on to the previous week’s 3.9 percent gain.
It is still down more than 4 percent in February so far, however, after global equity markets were mauled at the start of the month by worries that inflation is picking up.
Japan’s Nikkei rose 0.7 percent.
China’s SSE Composite index and the blue-chip CSI300 both pared early gains after the government seized control of acquisitive financial conglomerate Anbang Insurance, in a dramatic move that underscores Beijing’s intent to crackdown on financial risk.
The gains in Asia followed a sell-off Thursday after minutes of the Fed’s last meeting showed policy makers were confident about the economic outlook. That prompted some investors to boost the chance of faster rate hikes.
St Louis Fed President James Bullard tried to tamp down expectations of four rate hikes in 2018, instead of the widely anticipated three, saying on Thursday policymakers need to be careful not to increase rates too quickly because that could slow the economy.
The Fed had caused a so called “taper tantrum” in May 2013 when it signaled it was time to stop pumping cash into the U.S. economy, a move that created havoc in financial markets particularly Asia.
But analysts are more upbeat about the outlook for the region despite prospects of rising U.S. inflation and rates.
“Financial market volatility has not dented our constructive view on Asia’s growth outlook for this year,” said Khoon Goh Singapore-based Head of Research for ANZ.
“Higher inflation and a larger fiscal deficit in the United States will likely see U.S. bond yields move higher, but improved fundamentals in Asia mean the region is better placed to weather this than in 2013.”
Analysts expect the market to be in a “holding pattern” ahead of a slew of important U.S. January activity data on Tuesday, followed by global surveys on manufacturing activity on Thursday.
The dollar was up 0.1 percent at 106.91 yen amid rapidly shifting views in U.S. monetary policy.
The yen, which tends to benefit during times of heightened volatility or uncertainty, rose almost 1 percent overnight.
The euro dipped to $1.2303 after gaining 0.4 percent the previous day. The common currency has lost more than 0.75 percent so far this week, following its ascent to a three-year top of $1.2556 on Feb. 16.
Oil prices eased from two-week highs, as high U.S. crude exports outweighted lower crude inventories in the world’s biggest consumer of the fuel.
U.S. crude was off 3 cents at $62.74 per barrel and Brent eased 7 cent to $66.32.
Spot gold slipped 0.3 percent to $1328.05 an ounce.
Reporting by Swati Pandey;
With Easy Ride Trial Nissan Takes New Step Toward Being Uber Competitor
YOKOHAMA – Facing a future in which self-driving cars may curb vehicle ownership, Nissan Motor Co is taking its first steps to becoming an operator of autonomous transportation services, hoping to break into a segment set to be dominated by Uber Technologies and other technology firms.
In partnership with Japanese mobile gaming platform operator DeNA Co, the automaker will begin public field tests of its Easy Ride service in Yokohama next month, becoming among the first major automakers anywhere to test ride-hailing software developed in-house, using its own fleet of self-driving electric cars.
Easy Ride, which Nissan plans to launch in Japan in the early 2020s, is meant to feel more like a concierge service on wheels, making – for example – restaurant recommendations while the car is on the move.
The announcement follows an agreement by Nissan and its automaking partners Renault SA and Mitsubishi Motors Corp earlier this month to explore future cooperation with Chinese transportation services conglomerate Didi Chuxing.
These moves mark a push by the automaker to avoid becoming the “Foxconn of the auto industry”: a mere vehicle supplier to ride- and car-sharing companies.
“We realize that it’s going to take time to become a service operator, but we want to enter into this segment by partnering with companies which are experts in the field,” Nissan’s chief executive, Hiroto Saikawa, told Reuters in an interview this month.
A person close to the deal has said that the agreement is intended to explore opportunities for Nissan and others to supply battery-electric cars to Didi Chuxing for a new electric car-sharing service it is setting up in China.
He noted however that Nissan and its alliance partners could explore a broader agreement, which might possibly involve Nissan providing self-driving taxi technology to the dominant Chinese ride-hailing service.
Creating an upscale autonomous taxi service, rather than trying to beat other companies on price, could help Nissan against bigger competitors like Uber, market experts say.
“By doing something with a more premium feel, it could allow Nissan to charge more for its service and potentially relieve some of that profitability pressure they could face if they were to try to race to the bottom in terms of pricing,” said Jeremy Carlson, automotive analyst at IHS Markit.
Automakers are looking for ways to profit from the rise of car-sharing services, which along with self-driving cars, are likely to lead to a decrease vehicle ownership and chip away at future profits.
IHS Markit expects global sales of autonomous vehicles will soar to more than 33 million units in 2040 from 51,000 in 2021, while Goldman Sachs has predicted that the ride-hailing market will grow eightfold by 2030 to be five times the current size of the taxi market.
Nissan has embraced new technologies, launching the Leaf, the world’s first mass-market electric car, in 2010. The company was an early proponent of self-driving cars, pledging in 2013 that it would market fully autonomous cars in 2020.
Although it has been rolling out automated highway driving functions and self-parking capabilities in a growing number of its models, rivals ranging from Tesla Inc to Subaru Corp have installed increasingly advanced self-driving features in their cars.
GM and Daimler AG are building and expanding car- sharing services, and GM has said it plans to launch a self-driving taxi service next year.
Nissan also has its own car-sharing service using its ultra-compact battery electric models, but after years of trials, the service is available only in Yokohama, home to the automaker’s headquarters.
After bringing in Ogi Redzic, who previously led the automotive business group of mapping data firm Here Technologies, to head Renault-Nissan’s mobility services division in early 2016, Nissan in the past year or so has begun to gear up its strategy to compete in the new transportation area.
Its partner DeNA is one of the world’s biggest social gaming networks with 30 million users. The company’s expertise in developing real-time user interfaces and payment systems will help give shape to the taxi service platform.
The company already operates a user-sourced car-sharing app in Japan, and had been developing a self-driving taxi system with a Japanese robotics start-up before teaming up with Nissan.
Additional reporting by Norihiko Shirouzu in Beijing
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