Big companies like automaker Ford, aircraft builder Boeing and beverage king Coca-Cola are planning to cut the cash they put into employees' pensions this year. Investors are hoping to get their hands on the money instead.
Thanks to the rising stock market and higher interest rates, companies aim to cut contributions to their employee pension plans by 28% or $16 billion this year to $40 billion, says research firm International Strategy & Investment, based on estimates provided by the 345 companies in the that still have pension plans.
These expected 2014 pension contribution cuts come after the companies already reduced their pension contributions 27% in 2013 to $56 billion, the lowest contribution since 2008, ISI says. That's all money investors hope will be coming their way in the form of dividend hikes or stock buybacks.
The S&P 500 companies planning to cut their contributions in 2014 to pension plans the most include:
| Company | Symbol | Expected contribution cut $ mils | % expected contribution cut |
|---|---|---|---|
| Ford Motor | F | -$3487 | -65% |
| Lockheed Martin | LMT | -$1250 | -56% |
| Boeing | BA | -$792 | -51% |
| Computer Sciences | CSC | -$625 | -84% |
| Allstate | ALL | -$523 | -93% |
| Chevron | CVX | -$511 | -42% |
| Northrop Grumman | NOC | -$505 | -87% |
| Johnson & Johnson | JNJ | -$491 | -87% |
| Coca-Cola | KO | -$464 | -73% |
| Marsh & McLennan | MMC | -$461 | -71% |
Source: International Strategy & Investment
These companies' decision to cut their pension contributions is similar to a consumer deciding to cut back contributions to a 401(k) retirement account. The smaller contributions opens up more free cash, which in the case of the companies, investors are hoping they can get their hands on.
Investors hope the money not being put into pension plans, if not paid out as dividends, might benefit them indirectly through the purchase of capital equipment, which could boost profit in the future.
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The companies expected to get the biggest boost to cash flow by cutting back their pension contributions include Ford, United States Steel and motorcycle maker Harley-Davidson, ISI says.
All these companies, plus tech services firm Computer Sciences, insurer Marsh & McLennan, defense contractor Lockheed Martin, lab services company Perkin Elmer, defensive contractor Northrop Grummanand auto-parks maker BorgWarner, are all expected to enjoy 13% or higher boosts to cash flow due to pension contribution cutbacks, ISI says.
Investors had better not assume this cash is coming their way, though. Companies are infamous for underestimating how much they need to contribute to their pension plans, ISI says.
Companies end up contributing more to pensions than they expect 71% of the time, ISI says. If the plans' investment returns come in below expectations, a possible scenario given the market's poor showing this year and a decline in interest rates, the cash may not be up for grabs, after all.
Also, new mortality tables and pension regulations could boost the requirements for pension contributions, ISI says.
And while pension plans are in better shape now than they've been in awhile, they were still underfunded by $228 billion at the end of last year, ISI says.
"Higher earnings and higher cash flows sure do sound like a pension party," ISI says in its report. "But before you start doing the Kid N Play dance ask yourself whether it's sustainable."
—By Matt Krantz of USA TODAY