July 20, 2012
--- A majority
of large U.S. corporate pension plans are underfunded, with future
contributions a material expense for many over the coming years, according Fitch
Ratings. ---
Fitch’s review encompassed 230 nonfinancial U.S.-based
companies with defined benefit pension plans that have U.S. projected benefits
obligations (PBOs) of $100 million or more. Of the 230 companies analyzed, 160
were less than 80% funded and warrant further investigation, based on the 80% ‘at
risk’ threshold in the Pension Protection Act (PPA).
Of the remaining 70 companies, 43 were funded in the 80% to
90% range, while 27 companies were funded above the 90% level. The capital
goods, consumer and retailing sectors stood out with median plan funding levels
of less than 70%.
Fitch believes the contribution amounts are material for
many issuers. In Fitch’s sample, 34% of the 230 companies have an estimated
pension outflow as a percentage of pre-contribution funds from operations
(FFO), or cash flow from operations less working capital, above a 10%
threshold.
Another five companies had negative FFO before pension
contributions. Fitch estimates that the potential funding requirements of nine
companies could amount to 40% or more of their 2011 pre-contribution
FFO.
Relief provided for under the “Moving Ahead for Progress in
the 21st Century Act” (MAP-21) signed in July may allow plan sponsors to lower
near-term pension contributions. The act provides for a materially higher
discount rate for funding purposes, thus lower the present value of
liabilities. In Fitch’s opinion, cash flow constrained issuers may benefit from
the near-term relief, but for the majority of plan sponsors a more prudent
approach will call for funding above minimum levels (see “DB
Sponsors Have Incentive to Keep Plans Well Funded”).
The full report “U.S. Corporate Pensions 2012 Overview” is
available here.
Rebecca Moore