What are the risks associated with making a pension plan contribution with company stock?

According to Mercer Investment Consulting, a stock contribution to a pension plan may be a good short-term strategy, but both the company and the pension plan face too much risk to justify the inclusion of stock for an extended period of time.

Employers need to carefully consider their options for making necessary contributions to the pension plan, including borrowing money to fund a cash contribution. The presence of stock has serious implications for the company and may be at odds with the objectives and strategic investment policies of the pension plan.

Implications include:

• Increased investment risk in the pension plan due to lower diversification, higher linkage of company and plan performance, and leverage of the company. This increased risk may lead to increased volatility of funded status, contributions and earnings.
• Increased fiduciary risks to management and an additional burden placed on fiduciaries to manage the allocation of company stock in the portfolio. Participant concern and litigation risk may be increased.
• Tax and accounting consequences. The increase in company stock could increase shareholder equity and/or dilute shareholder value.

Reprinted with permission. © CCH