The $36-billion conglomerate of contributions applies to 215 of the 354 S&P 500 companies with defined benefit plans who will likely need to make additional contributions to help cover the $213 billion in projected underfunded future fund obligations. Further, for 19 of those companies, estimated funding requirements will exceed 30% of their most recent fiscal year free cash flow; and 30% of their cash balance or net working capital, which ever is greater, according to a study by FTI Consulting.
“Our analysis has identified companies that don’t have the current resources on hand to make the contributions nor the ability to generate the needed cash through operating activities,” said Dominic DiNapoli, co-head of FTI Consulting’s restructuring practice, in a statement. “These companies face complex choices on how to fund required contributions. They may need to divert internally generated funds from reinvestment or shareholder distribution. Alternatively they may need to draw on bank lines or other external sources of capital.”
Additionally, FTI cautions that the underfunded pension plans may carry longer term ramifications for companies, including:
- negative earnings impact of growing Net Periodic Pension Costs
- financial covenant violations of loan agreements or bond indentures
- credit ratings downgrades by rating agencies
- inability to reinvest capital in business which may impede long-term competitiveness
- payment defaults by companies with inadequate liquidity to cover mandatory pension fund payments.
However, the news is not all bad. Of the 319 companies in the S&P 500 that FTI found with underfunded pension plans at the end of 2002, 195 are in fact reporting an overfunded pension plan position, based on GAAP pension accounting rules.
Overall, FTI’s results correlated with earlier studies released by Standard & Poor’s and Credit Suisse First Boston Corp. Standard & Poor’s said 2002 saw a $206-billion pension shortfall among308 companiesin the S&P 500 (See S&P: $206 Billion Pension Shortfall in 2002 ). Previously, an analyst for Credit Suisse First Boston Corp reported the pension plans of S&P 500 companies in aggregate were underfunded by $216 billion at the end of 2002 (See Companies Pour $46 Billion Into Pensions in 2002 ).
The study is an analysis of defined benefit pension fund details disclosed in 10-K filings with the SEC by S&P 500 companies. The estimate is based on end-of-year GAAP pension data and disclosures for fiscal 2002.