The prospect of higher interest rates that alarmed U.S. stock markets this month prompted a different reaction at General Electric, the 126-year-old manufacturer grappling with a $31 billion pension-funding gap in addition to an array of operational obstacles.
Each 25 basis-point rate increase narrows the retirement-plan shortfall by about $2.2 billion, Chief Financial Officer Jamie Miller said Wednesday at a conference in New York. Since rates aren’t factored into the Boston-based company’s current plans for addressing the gap, “that actually helps us from a pension perspective,” she explained. “That’s another tailwind.”
GE said at the beginning of the year that it would borrow $6 billion to make its pension contributions through 2020 in advance, and “our deficit is such that — even in what we expect to be, for at least a while, a rising interest-rate environment — we still expect to do that pension pre-funding right now,” Miller noted at a separate conference later in the day.
The pension-funding shortfall at the company, along with its peers across the country, widened over the past decade as years of near-zero interest rates following the 2008 financial crisis sapped returns on investments intended to fund retirement plans even as the number of people aging out of the workforce steadily increased.
Any help closing it would come at a particularly timely moment for GE, whose new CEO, John Flannery, is addressing a withering market for its power business, one of the conglomerate’s largest; straitened cash flow that forced executives to cut the quarterly dividend for the second time in less than a decade and a regulatory probe into insurance liabilities at its finance business.
Speculation that the Federal Reserve might accelerate its rate increases, possibly approving more than the three 25 basis-point hikes it had signaled for this year, intensified with hourly wage growth that neared 3 percent in January even as the jobless rate stayed at a recent low of 4.1 percent.
That prompted a plunge in both the Dow Jones Industrial Average, which had surged to a record above 26,000, and the broader S&P 500, in early February. While both indexes have pared losses since, they have yet to regain the levels at which they ended 2017.
As of Wednesday afternoon, trading in interest-rate futures indicated odds of slightly more than 50 percent that the central bank would raise short-term rates four times before Dec. 31. Market pressure, meanwhile, is likely to drive long-term rates up further after Congress suspended the country’s debt ceiling, allowing the Treasury to borrow more money.
Treasury’s outstanding public debt of $14.2 trillion at the end of September already accounted for a substantial portion of the $40.3 trillion bond market and dwarfed some $8.7 billion in corporate debt. Now, it must issue more bonds to paper over additional gaps of $1.5 trillion created with the GOP’s tax overhaul in December and $320 billion with a spending agreement this month.
GE investors, meanwhile, are grappling with unwelcome financial developments of their own. The company’s stock is down 14 percent this year, trading at $14.96 early Thursday, after a net loss at the end of 2017.
That was driven by a $3 billion charge from the Republican-led tax overhaul and a $6.2 billion hit for insurance liabilities. While the tax bill will ultimately benefit the 126-year-old manufacturer founded by Thomas Edison, the insurance charge was yet another hindrance to Flannery’s turnaround efforts.
His predecessor, Jeffrey Immelt, had pulled out of the bulk of the insurance division about a decade before, selling $130 billion in policies but retaining some units, such as reinsurer North American Life & Health, the operation responsible for the charge.
Reinsurers provide backup for so-called primary insurers, taking on some of the risks of massive payouts in catastrophe-level events.
In GE’s case, holders who bought policies from the company’s clients decades ago, when they were younger and in better health, are now making higher-than-anticipated claims to cover expensive new treatments and for longer periods of time, since medical advances have prolonged life expectancy.
The Securities and Exchange Commission is reviewing GE’s handling of the matter.
