Pension funding levels have improved this year, in large part because of recent interest rate increases and strong equity market performance. Fitch Ratings, however, believes that severely underfunded plans could still face plenty of turbulence and uncertainty in the years ahead.
Fitch reviewed 224 non-financial U.S.-based companies with DB plans having U.S. projected benefit obligations of $100 million or more. Of those, 148 were less than 80 percent funded.
Of the remaining 76, 57 were funded between 80 and 90 percent and 19 companies were funded above the 90 percent level. The energy, retail and telecommunications sectors stood out, with median plan funding levels of 70 percent or less.
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Fitch believes contribution amounts are material for many issuers. In Fitch's sample, 36 percent of the 224 companies have an estimated pension outflow as a percentage of pre-contribution funds from operations above 10 percent.
Fitch estimates that the potential funding requirements of 16 companies could amount to 40 percent or more of their 2012 pre-contribution outflow.
Relief provided under the Moving Ahead for Progress in the 21st Century Act, also known as MAP-21, allows plan sponsors to lower near-term pension contributions through a materially higher discount rate for funding purposes. In Fitch's opinion, cash flow-constrained issuers may benefit from the near-term relief, but for the majority of plan sponsors, a more prudent approach will call for funding above minimum levels.
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