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US pensions' funding gap closes, driving corporate profits
Muhammad Iqbal
24 Jan, 2014
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![](https://i.brecorder.com/images/2014/01/downpension32.jpg">NEW YORK: Corporate America is rapidly healing one of the last wounds suffered in the 2008 financial crisis. Large companies' pension plans are reporting among their best returns on record in 2013, dramatically closing funding gaps that had opened up because of losses in the 2008-2009 stock market collapse, and as government bond yields sank. </P><P>All told, companies in the S&P 500 saw an aggregate improvement of more than $300 billion in their pension plans, a gain that brought assets to around 93 percent of expected obligations, according to International Strategy & Investment, a New York research firm. </P><P>That is a robust recovery from 2008, when they hit an all-time low of only 70.5 percent. For investors, the performance of corporate pension plans is a small but under-appreciated side effect of the bull market that has now lasted for nearly five years. </P><P>It will free up corporate cash for dividends, stock buybacks, and new investments, while helping to drive earnings growth, which could give a further nudge up to stock prices, analysts say. Some companies may also see upgrades to their bond ratings, lowering their future borrowing costs. </P><P>David Zion, an analyst at ISI who co-authored the report, estimates that the strong performance of pension plans will save companies in the S&P 500 a total of $26 billion in the current fiscal year, resulting in a 1.6 percent boost for the 2014 earnings per share of the index. </P><P>Analysts tracked by Thomson Reuters currently expect earnings per share to rise 10.7 percent this year. </P><P>The benefits mostly accrue to older industrial companies, or those who were traditionally unionized, as some of their workers and many of their retirees tend to have the more generous defined-benefit plans that are directly funded by the companies. </P><P>The newer technology and service companies, who tend to rely on 401K plans that are largely the responsibility of workers to fund, are mostly not affected. </P><P>Some companies reporting their fourth-quarter earnings in the past few days have already said their results are benefiting from reduced pension costs. </P><P>Business jet manufacturer Textron Inc, for instance, saw its shares jump to a five-year high Wednesday after its earnings beat analyst estimates. </P><P>Along with a rebound in the business jet market, the company is riding the performance of its pension plan. In 2010, it contributed about $417 million to the plan as its funding ratio fell to 77 percent, while in 2014, it expects to contribute just $80 million a decline of nearly 81 percent. </P><P>And now its pension plan is funded at an estimated 101 percent level, according to ISI. </P><P>The same day, AT&T Inc said it expects to record a pre-tax gain of about $7.6 billion in the fourth quarter from its pensions and post-employment benefit plans. </P><P>A day earlier, Verizon Communications Inc reported fourth-quarter 2013 earnings of $5.07 billion, $3.7 billion of which was due to increases in the value of its pension and other benefit plans. </P><P>)