While S&P 500 companies expect to pay in $16 billion less to their defined-benefit pension plans in 2014 than they did last year — delivering a cash-flow boost of more than 5 percent at 44 of the companies — they should be careful about partying hard on those expected cash gains, according to a new report.
To be sure, lower pension outlays can provide plan sponsors with extra cash for organic growth, mergers and debt repayments, or be used to reward shareholders via buybacks or dividends. But if companies underestimate their pension contributions, they might find themselves short on cash in future years, the authors of the ISI Group report on pension contributions caution.
Indeed, there’s a substantial risk that companies will end up paying in more to their pensions than they previously thought, meaning that there will actually be less cash left over, according to the report, which analyzes the companies’ expected pension outlays disclosed in prior year 10-Ks. Over the past decade, S&P 500 companies contributed more to their pension plans than they were expecting 71 percent of the time. What’s more, pension contributions were within plus or minus 10 percent of the company’s “best estimate” only 28 percent of the time.
To be sure, investment gains sparked by rising share prices and higher interest rates have boosted the funded status of the S&P 500′s plans by $235 billion, from $463 billion underfunded (77 percent funded) in 2012 to $228 billion underfunded (88 percent funded) at the end of 2013, according the report. The authors note that because “the plans got healthier last year,” sponsors should have lower pension costs and thus an earnings boost.
But the big pension boost to cash flow might have already occurred last year, they cautioned. S&P 500 companies contributed $56 billion to their pension plans in 2013, a decrease of 27 percent from the $77 billion contributed in 2012 — and the lowest amount since 2008. The decrease may have contributed to last year’s 1 percent boost in cash flow from operations. “Don’t count your cash flow chickens before they hatch,” the authors advise.