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. MAP-21 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 at http://www.fitchratings.com.
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