Companies are adding billions in contributions to their decimated pension plans, desperately trying to boost funding levels.
Watson Wyatt Worldwide estimates combined required contributions to U.S. corporate pension plans this year will total $32.4 billion, with even larger sums due in 2010 and 2011.
Among the large U.S. pension plans that have already made or announced intentions to make large contributions in 2009:
• Exxon Mobil Corp., $3.9 billion, compared with $52 million in 2008;
• Ford Motor Co., $1.5 billion, vs. $144 million last year;
• Boeing Co., $1.5 billion, up from its 2008 contribution of $531 million;
• Raytheon Co. expects to contribute $1.1 billion by the end of 2009; and
• PepsiCo, $1 billion, up from $48 million in 2008.
The world economic crisis wreaked havoc on the funded status of U.S. corporate pension plans. The funded status of large U.S. pension plans — estimated at 110.5% in 2007 — plummeted to 81.2% at year-end 2008, according to an analysis of company filings by Pensions & Investments.
Watson Wyatt Worldwide estimates that U.S. corporations will have to contribute a total of $89 billion in 2010 — nearly three times this year's level — and $146 billion in 2011 to meet their required contributions. In 2008, companies contributed $38 billion.
Kevin Wagner, Watson Wyatt's retirement practice director in Atlanta, said he expects corporate contribution rates to increase dramatically in 2010, partly because of temporary funding relief legislation passed last December.
Without such relief from Pension Protection Act requirements, plans would have been on the hook for higher contribution levels this year, Mr. Wagner said. Instead, some of those contributions will be pushed out into future years.
Those higher expected contributions could spell trouble for some corporations' bond ratings, according to a report last month from Fitch Ratings Ltd. While ratings action would not be based solely on contribution levels, high contributions could be the tipping point for companies “on the edge of a rating category,” according to the report.
For now, many companies are turning to company stock and other non-cash assets to improve the funded status of their pension plans.
Boeing, Chicago, will make a discretionary contribution of up to $1.5 billion in company stock to its $40.6 billion defined benefit plans before the end of the year. Mr. Blecher said the mandatory contribution for 2009 is less than $100 million. The plans were 82.8% funded as of Dec. 31.
The contribution of stock will help bolster its pension plans while preserving financial flexibility, the company said in a release when the contribution was announced Oct. 26. It is the company's first contribution of stock to the pension plan, confirmed Todd Blecher, a Boeing spokesman.
“You can set a higher target (funding) level because you're dealing with a different 'currency' than dealing with cash,” he said in an interview.
He said the company is not releasing projections on when the plan will return to fully funded status.
Some analysts believe that companies are making discretionary contributions of company stock in such a tough environment — as in the case of Boeing — with the hope that the stock values will rebound in the future, thus boosting overall funding levels.
Norman Goldberg, chief fiduciary officer at Evercore Trust Co. in Washington, an independent fiduciary that manages oversees corporations' contributions of company stock to their pension plans, said he usually sees a “small handful” of company stock contributions in any given year, but now he's seeing “clusters” of about 15 to 20 companies considering or making such contributions.
Other companies that have contributed stock this year to their pension plans are United Technologies Corp., $250 million; Caterpillar Inc., $650 million; J.C. Penney Co. Inc., $340 million; Honeywell International Inc., $800 million; PPG Industries Inc., $55 million; 3M Co., $600 million; and The Brinks Co., $57.6 million, according to Mr. Goldberg.
Mr. Goldberg noted companies are focused on preserving cash and are taking the opportunity to contribute stock when they believe their stock is undervalued with the expectation that the price of the stock will rebound as the economy recovers.
He said plan sponsors see contribution of company stock as a “win-win” because they are able to make significant contributions in excess of their minimum required contribution.
“These (stock contributions) will offset future obligations. When they contribute cash they would most likely contribute what they owe when it is due.”