Corporate defined benefit plans will encounter wider funding gaps and rising contributions in 2012 because of declining discount rates and weak asset returns, according to a special report from Fitch Ratings.
“In Fitch's view, all other things equal, a one-percentage-point decrease in the discount rate could raise a plan sponsor's liabilities by 10% to 20%,” according to the report, “Pension Contributions on Upswing.”
Fitch analyzed 14 companies in the report with ratings of BBB- or lower; had pension plan funding of 80% or less and pension liabilities equaling or exceeding $1 billion; and had estimated pension benefit outflows in the latest fiscal year that were 10% or more of pre-contribution funds from operations.
“Although many companies have some flexibility to increase contributions, others may not be so fortunate. Companies with weakly funded plans that are facing higher levels of contributions will not see pressures abate in the coming years,” the report states.
Most of the companies analyzed had large pension contributions in the last two years with Fitch expecting that number to grow, or at least remain constant, in the next few years.
Fitch detailed some underfunded plans and their contributions:
- Alcoa Inc. is expected to contribute $650 million in 2012 to keep the funded status of its $7.9 billion plan at 80% after contributing about $400 million annually from 2005 to 2008.
- Goodyear Tire & Rubber Co.'s $3.65 billion pension plan is 66% funded; the tire maker contributed $225 million to $250 million in 2011 but is expected to contribute $550 million in 2012 and $525 million in 2013.
- Delta Air Lines Inc.'s combined $8 billion DB plans are frozen and only 47% funded, but the airline will make a $650 million to $675 million contribution in 2012.
- Navistar International Corp. saw its $2.4 billion pension plan's net obligation increase by $900 million in 2011 as the company contributed $134 million; the plan is 57% funded. That number is expected to rise to $187 million in 2012 and $170 million each year for 2013-'15.
- Alliant Techsystems Inc. contributed $300 million to its $2.1 billion plan in 2010 when the minimum requirement was $45 million and still saw its funding position deteriorate because drops in the discount rates. Fitch anticipates that contributions could exceed minimums for years and be a high priority use of the company's cash.