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AK Steel’s Pension Expense Rises In 4Q14

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AK Steel’s pension expense

In the previous article, we saw how AK Steel’s average steel selling prices went down after its acquisition of Dearborn Works. In 4Q14, it incurred a one-time expense of $12.6 million, which accounted for acquisition costs for Dearborn and pension corridor charges.

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Pension corridor charges

The Society of Actuaries issued new mortality tables in October 2014, which increased the assumed life expectancy of participants in AK Steel’s defined benefit plans. AK Steel’s pension expense went up as a result of new guidelines.

AK Steel also reduced the discount rate used for its pension and Other Post-Employment Benefits (or OPEB) by 70 basis points. A reduction of discount rate leads to an increase in a company’s pension obligations.

The negative impact of these factors was partially offset by higher return generated by AK Steel’s pension plan. Its pension plan generated 9.5% returns in 2014. AK Steel expects its pension costs to come down significantly from 2015, as seen in the above previous chart.

US Steel

US Steel (X) also reduced the discount rate on its pension plan. However, the combined underfunded status of its pension plan has come down by $0.9 billion in 2014, mainly because it deconsolidated its Canadian operations. Its Canada operations accounted for ~$1 billion of its consolidated employee benefit liability.

You can also access the steel industry with Nucor (NUE), which currently forms 2.52% of the Materials Select Sector SPDR ETF (XLB). Allegheny Technologies (ATI) is also a part of XLB.

While pension costs increased for AK Steel, its unit production costs have come down. We will explore this in the next article.

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