PPA DB Funding Rules Drive Dash to Fixed Income

December 4, 2009 (PLANSPONSOR.com)With one eye cast toward the defined benefit plan funding rules in the Pension Protection Act (PPA), retailer J.C. Penney Co. is gradually moving its portfolio completely out of equities into fixed income from its current 20% level.

A Bloomberg news report, quoting spokeswoman Darcie Brossart, said the Plano, Texas-based company promised shareholders the move would “eliminate” the uncertainty of underfunded pensions. The plan has about 150,000 participants and beneficiaries

According to Bloomberg, J.C. Penney is aiming for a 75% fixed-income allocation by 2014 to 2017, depending on how quickly the stock market recovers from the downturn. In June, the fund held 70% equities, 20% fixed income and 10% to real estate.

The move will represent the highest level of fixed income holdings in the plan’s history, according to Brossart. High-quality corporate bonds will make up an increasing share of the fixed-income portfolio over time and currently make up a “meaningful component,” Brossart told Bloomberg.

Chief Financial Officer Robert Cavanaugh told analysts and investors on a conference call this summer: “At the end of the day, it’s real easy. Do you have enough cash to protect your associates’ retirement?”

Bloomberg said pension funds are increasing allocations of investment-grade debt to the highest level since the 1970s, when federal rules created a “bias” toward equities, as the U.S. mandates that plans set targets to fully fund worker obligations.

“We’re seeing more plans leaning toward corporate bonds than has been the case historically,” Mark Ruloff, Watson Wyatt director of asset allocation, told Bloomberg.  “It’s adding a new slate of buyers that weren’t in the market before.”