While we’re big fans of Xerox and the phenomenal Phaser 8560DN, a wax-based 
ink printer we’ve used for years in our office, this may be the least of their accomplishments. The contributions this 110 year old company has made to technology is quite impressive, including the computer mouse and ethernet. Now with the activist shareholder Carl Icahn in the mix the split of the company appears inevitable. Icahn will control three seats on the board of the services company, and we’re left to help our retiring Xerox clients answer the question, “Will the split affect my pension?”
The split
In January of this year current CEO Ursula Burns officially announced Xerox will split into two entities: a document technology business and a services business. The division is meant to make the company more efficient by reducing costs (estimates are $2.4 billion over three years) and narrowing management’s focus on the distinct challenges found within each part of the new structure.
Icahn’s short-term impact better than long-term
Interestingly, it’s been reported that activist investor Carl Icahn was the main contributor to this decision. However, in an interview with Bloomberg on Jan 29th, Burns stood her ground emphatically denying this allegation and citing the analysis of this decision had begun independent of Icahn’s involvement. Regardless of what came first, the decision or Icahn, he has a history of agitating companies into this result, most recently with the split of eBay and PayPal. The jury’s still out on the success of that split, but after reviewing Icahn’s success with other companies, it’s safe to say he’s interested mostly in short-term growth of a stock and not in the long-term health of a company.
For any Xerox employee with access to pension benefits in the future, assessing the strength of the pension should be at the top of their list. When determining the ability of the remaining pieces of the business to continue to pay monthly checks for the life of a retiree, three areas should be reviewed: credit rating, pension strength, and other options.
(Click or tap the arrows below to see more detail)
[expand title=”1. Credit rating in question“]
The job of a credit rating agency is to gauge how likely a company is to be able to keep their promises and pay those they owe. Moody’s, a large credit rating agency, currently has Xerox at a Baa2 rating, the lowest level of an investment grade rating. When the split was announced, Moody’s placed Xerox on their watch list for a downgrade. If this downgrade materializes it would place the new entity below the investment grade rating, often referred to as “junk” status.
This is not a good sign for the future health of the company and Moody’s cites these reasons for the credit negative watch:
• Reignites questions about the long-term health of the print business.
• Two resulting businesses will have less diversity and less profitability.
• The split results from a difficult 2015, which could foreshadow a permanent reduction in equipment purchases.
Please contact us for a copy of this Moody’s report.[/expand]
[expand title=”2. Pension strength is low“]
There are a number of ways to evaluate the strength of a company’s pension plan. The most important measure being the funding ratio.
• In September 2013 Xerox ranked 7th worst funded pension in the S&P 500 with a 77% funded calculation, or 23% underfunded.*
• In April of 2015 Xerox moved down one notch to 6th worst funded pension with an updated calculation of 66% funded, or 34% underfunded.**
These are sobering numbers and anyone with access to this benefit should be thinking long and hard about the viability of the lifetime payout. Fortunately, the Pension Benefit Guaranty Corporation (PBGC), a government-backed agency that steps in when companies cannot afford to continue to pay the benefits, is available if Xerox can no longer fund the pension. However, this backing is subject to limits and could result in a reduction in benefits for those taking the payout.
Please contact us for more details on the PBGC limits.[/expand]
[expand title=”3. Is the lump sum a better option?“]
Rather than choose a lifetime payout and rely completely on Xerox (and possibly the PBGC) to cover your expenses in retirement, a better option for the retiree may be the lump sum. This allows employees to remove their money from the underfunded plan and roll it over into an IRA. Once in the IRA the retiree can invest the proceeds themselves, if they’re competent in investment management, or use a trustworthy financial advisor (like a CFP) to help them manage the assets.
A caution when considering the lump-sum options are the endless investing options retirees will have. We offer a list of just about all investment options available, the pros and cons of each, and an explanation of the moderate risk, growing dividend portfolio we favor that’s treated clients well in retirement.
At this point we should mention we get paid to manage investments for clients, so we are unquestionably biased in favor of this lump-sum option. Regardless of this fact, the Xerox pension scenario is troubling and retirees facing this decision must give it serious thought. We strongly encourage all potential retirees to talk this through with us, or with their trusted financial advisor.[/expand]
Please contact us if you’d like more details on the Xerox pension, or how we might be able to serve you in retirement.
*S&P Capital IQ Report: Exploring Pension Plans, September 2013
**Pension and Investing Magazine: 10 Worst Funded Pension Plans, link here, April 2015