The Next Shoe to Drop? Corporate Pension Plans - Part I

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 |  Includes: AF, AGU, AMAT, APA, AYI, CCJ, CLX, D, DTEGY, ETN, GT, GTLS, HMC, IMO, JRCCQ, KMT, MDP, MGA, MTLCF, PG, RT, SIEGY, SSL, STR, TCK, TER, TOSBF, TXI, UBS, UPS, VAL
by: Kenneth Hackel, CFA

A story that never received the proper publicity during the bull market of 2009-2010 was the financial markets' very positive (savior) impact on pension funding status, and employer contributions. The rise in equity markets allowed many hundreds of billions of dollars to appear on the balance sheet as equity instead of having to be spent to plug the pension gap.

But most of the firms which benefitted are not out of the woods, as the negative stock performance during 2010 is sure to re-introduce large employer expenditures which will impair security analyst estimates.

The following is a list of firms which:

  • Have, for their most recent fiscal year, accrued a greater expense for their pension plans than they actually contributed;

  • Have seen a decline in the value of their plan assets over the past 2 years;

  • Have either maintained or increased their discount rate (assumed rate of return) over the past 2 years;

  • Have seen an increase in their pension benefit obligation over the past 2 years.

Presumably, firms which have suffered a decline in their plan assets and/or an increase in their pension obligations should not be forecasting an increase in their settlement rate, which is the rate their projected benefit obligation could be settled. Firms might do this to show a lower liability and to lower their plan contributions. Their auditors and actuaries should only allow this for a short time before demanding stepped-up contributions, although investors should act more quickly.

Table 1 (Click to enlarge)

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The following table shows, for the same firms in Table 1, last year’s pension expense as a percentage of net income, the funded status of their plans, these firm’s total debt to which we include operating lease obligations and shareholders’ equity.


Table 2
(Click to enlarge)

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For some there might be a number of surprising names on the list, keep in mind that additional large funding into the plans would most likely cause a disappointment to earnings and cash flow estimates, even though the firm might have the credit capacity to fund with low cost of capital. In the game of expectations, such firms are particularly vulnerable given their funding status and have not, of late, contributed their actual expense.

Several firms on the list look particularly vulnerable. One such is Goodyear Tire (NASDAQ:GT), whose plan (see Table 3 summary below) is very underfunded, they have not had the financial ability to catch up, and have a high cost of capital. As the table shows, many firms are vulnerable.

Table 3

Click to enlarge

The pension and other post-retirement benefit area should be receiving greater scrutiny than it currently receives, as time is sure to tell.

>>Go to Part II


[1] Pension-Funded Status Indicates the funded status of a pension plan as either overfunded or underfunded. This item is the sum of: Pension - Long Term Asset minus the sum of (1) Pension - Current Liability and (2) Pension - Long-Term Liability



Disclosure: No positions