Morgan Stanley does not provide tax, legal or accounting advice. This is not a research report and was not prepared by Morgan Stanley research department. This material has been prepared for information purposes to support the promotion or marketing of the transaction or matters discussed herein. It is not a solicitation of any offer to buy or sell any security, commodity or other financial instrument or to participate in any trading strategy. This material is not (and should not be construed to be) individualized “investment advice” (as defined under ERISA) from Morgan Stanley with respect to any employee benefit plan or to any person acting as a fiduciary for an employee benefit plan, or as a primary basis for any particular plan investment decision . This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Please see additional important information and qualifications at the end of this material. Pensions in Practice OCTOBER 27, 2010 A Morgan Stanley Publication For Pension Plan Sponsors How Corporate Pension Plans Impact Stock Prices • The Fed’s “quantitative easing” program, which has caused a plunge in yields, has widened pension funding gaps by boosting the present value of pension liabilities, as Morgan Stanley’s chief U.S. economist, Dick Berner, points out. This creates dilemmas for CFOs. • Low interest rates expose four key risks embedded in pension plans: 1. Pension risk adds volatility to companies’ stock prices 2. Pension risk increases a firm’s beta 3. Pension risk increases a firm’s cost of capital 4. Investors view pension liabilities as riskier than debt • Our study found both empirical and statistical evidence that pensions weigh on the stock prices of pension-heavy companies. The pension- heavy threshold is a pension liability in excess of 25% of market cap. • Since the credit crisis began, plan size and funded status are the two pension factors that impact stock price performance most. Asset allocation matters less—though in different times it has mattered more. • Surprising corporate finance implications stem from our analysis. The benefit from reducing a company’s WACC may outweigh the cost of actions such as funding the pension deficit by issuing company stock, or terminating the pension despite locking in historically low interest rates. Similarly, funding pension deficits with debt would likely create shareholder value by reducing enterprise volatility and lowering WACC. Pension Solutions Group Caitlin Long 212.761.4995 [email protected]C Ethan Bronsnick 212.761.5343 [email protected]Hannah Zwiebel 212.761.3070 [email protected]Pension, Endowment and Foundation Coverage Group Sandra Haas 212.761.1320 [email protected]Chris Crevier 212.761.0039 [email protected]Ryan Vetter 212.761.8124 [email protected]Michael Jordan 212.761.1077 [email protected]Transition Management Jim Kelly 212.761.8935 [email protected]
Analyst research re: the positive impact to valuations stemming from funding pension deficits.
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Morgan Stanley does not provide tax, legal or accounting advice. This is not a research report and was not prepared by Morgan Stanley research department. This material
has been prepared for information purposes to support the promotion or marketing of the transaction or matters discussed herein. It is not a solicitation of any offer to buy or
sell any security, commodity or other financial instrument or to participate in any trading strategy. This material is not (and should not be construed to be) individualized
“investment advice” (as defined under ERISA) from Morgan Stanley with respect to any employee benefit plan or to any person acting as a fiduciary for an employee benefit
plan, or as a primary basis for any particular plan investment decision . This material was not intended or written to be used, and it cannot be used by any taxpayer, for the
purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Each taxpayer should seek advice based on the taxpayer’s particular
circumstances from an independent tax advisor. Please see additional important information and qualifications at the end of this material.
Pensions in Practice
O C T O B E R 2 7 , 2 0 1 0
A Morgan Stanley Publication For Pension Plan Sponsors
How Corporate Pension Plans Impact Stock Prices • The Fed’s “quantitative easing” program, which has caused a plunge in
yields, has widened pension funding gaps by boosting the present value of pension liabilities, as Morgan Stanley’s chief U.S. economist, Dick Berner, points out. This creates dilemmas for CFOs.
• Low interest rates expose four key risks embedded in pension plans:
1. Pension risk adds volatility to companies’ stock prices
2. Pension risk increases a firm’s beta
3. Pension risk increases a firm’s cost of capital
4. Investors view pension liabilities as riskier than debt
• Our study found both empirical and statistical evidence that pensions weigh on the stock prices of pension-heavy companies. The pension-heavy threshold is a pension liability in excess of 25% of market cap.
• Since the credit crisis began, plan size and funded status are the two pension factors that impact stock price performance most. Asset allocation matters less—though in different times it has mattered more.
• Surprising corporate finance implications stem from our analysis. The benefit from reducing a company’s WACC may outweigh the cost of actions such as funding the pension deficit by issuing company stock, or terminating the pension despite locking in historically low interest rates. Similarly, funding pension deficits with debt would likely create shareholder value by reducing enterprise volatility and lowering WACC.
Pension Plans’ Impact on Stock Prices Pension Plans’ Impact on Stock Prices We conducted both empirical and statistical studies to confirm our thesis that pension plans indeed impact the stock prices of the companies sponsoring them.
We conducted both empirical and statistical studies to confirm our thesis that pension plans indeed impact the stock prices of the companies sponsoring them.
I. Empirical Findings I. Empirical Findings
a. Pension-heavy stocks have been more correlated with equity markets than companies without material pension exposure. Pension-heavy stocks—those whose pension liabilities exceed 25% of market cap—underperformed during the credit crisis, between October 2007 and March 2009 (see Exhibit 1). Subsequently, during the rebound, pension-heavy stocks outperformed from March 2009 to April 2010 (see Exhibit 2). During both periods, the trends became more pronounced as pension exposure increased.
a. Pension-heavy stocks have been more correlated with equity markets than companies without material pension exposure. Pension-heavy stocks—those whose pension liabilities exceed 25% of market cap—underperformed during the credit crisis, between October 2007 and March 2009 (see Exhibit 1). Subsequently, during the rebound, pension-heavy stocks outperformed from March 2009 to April 2010 (see Exhibit 2). During both periods, the trends became more pronounced as pension exposure increased.
Exhibit 1:Exhibit 1: Pension-Heavy Stocks Underperformed During Credit Crisis, 10/17/2007–3/6/2009 S&P Total Return: -44.38%
4 3815172445
7517 1322
283752
67
85
0.20.20.4
0.50.50.5
0.7
0.9
0
30
60
90
120
150
180
10% 20% 30% 40% 50% 60% 70% 80%
0.0 x
0.2 x
0.4 x
0.6 x
0.8 x
1.0 xNumber of Companies Ratio of Outperformers/Underperformers
4 3815172445
7517 1322
283752
67
85
0.20.20.4
0.50.50.5
0.7
0.9
0
30
60
90
120
150
180
10% 20% 30% 40% 50% 60% 70% 80%
0.0 x
0.2 x
0.4 x
0.6 x
0.8 x
1.0 xNumber of Companies Ratio of Outperformers/Underperformers
Pension Liabilities as a Percent of Market Capitalization
# of Underperformzers
# of Outperfozzzrmers
Ratio below 1x indicates there were more underperformers (red) than outperformers (green)
Outperformers/Underperformers ratio
Sources: FactSet, Morgan Stanley
Exhibit 2: Pension-Heavy Stocks Outperformed During Recovery, 3/6/2009–4/23/2010 S&P Total Return: +66.57%
Pension Liabilities as a Percent of Market Capitalization
25 223138476576104 4 3
111219
3047
766.3
2.82.2
1.61.4
2.53.2
7.3
0
50
100
150
200
10% 20% 30% 40% 50% 60% 70% 80%
0 x
2 x
4 x
6 x
8 xNumber of Companies Ratio of Outperformers/Underperformers
Ratio above 1x indicates multiple of outperformers (green) relative to underperformers (red)
# of Underperformers Outperformers/Underperformers ratio# of Outperformers
Sources: FactSet, Morgan Stanley
Pension exposure did not matter to stock price during the prior pension funding crisis of 2001-02. Indeed, it is different this time. Since the beginning of the credit crisis,
pension plans empirically mattered more to stock prices than during either the 2001-2002 stock market correction and 2003-2007 rebound. Potential reasons why ‘it’s different this time’ include historically low interest rates (which causes pensioners’ claim on firm value to be substantial), higher volatility in markets, and sector rotation away from technology (which masked correlation between stock price and pension exposure in 2001-2002).
We also compared the average historical and predicted betas for S&P 500 companies between 2003 and September 30, 2010, and found the following trend:
b. Pension-heavy stocks have consistently exhibited higher betas than those of non-pension heavy stocks, and the difference grew after the financial crisis began (see Exhibit 3). We found that the trend also holds true whether including or excluding technology stocks.
Exhibit 3: Average Annual Betas: 2003–09/30/2010 S&P 500 companies, excluding financial services and technology
Beta
Sources: FactSet, Morgan Stanley
II. Statistical Findings
Our statistical analysis tested whether pension metrics helped explain stock price beyond simply using earnings per share forecasts. We tested four pension metrics: (a) pension plan size (pension liabilities relative to market capitalization); (b) equity allocation of pension assets; (c) funding status (pension assets less pension liabilities); and (d) contributions as a percentage of pension assets. We performed this analysis between 2002-2009 as well as sub-periods, 2002-2004, 2005-2007, and 2007-2009. We summarize our key findings below, and provide supporting data in Exhibits 4 and 5a, 5b and 5c.
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley Research Department, and you should not regard it as a research report. Please refer to important information and qualifications at the end of this material.
a. Pension exposure impacts stock prices. Pension plans’ size relative to market capitalization, funded status, and allocation to equities each showed a statistically significant relationship with stock prices.
b. Pension plan size is negatively correlated with stock price—meaning the larger the plan size relative to market cap, the lower the stock price. This relationship is (1) Statistically significant if t-score > 1.96
understandable in the context of extremely low interest rates, since pension liabilities begin to behave like perpetuities as interest rates approach zero and pensioners’ claim on a firm’s value grows. Pension size impacted stock price during each sub-periods and the entire 2002-09 period.
Pension size, funded status, and equity allocation are all statistically significant, as
indicated by a t-score >1.96
c. Stocks of companies with better-funded pension plans are more highly valued by the stock market than stocks of companies with large underfunded pensions. However, funding status was not relevant during the stock market rally of 2005-07.
d. Equity allocation impacts stock price over time, although it is inconsistent in sub time periods and matters substantially less today than it did earlier in the 2000s.
e. Contributions to the pension plan have no clear impact on stock performance. Contributions have become more relevant in recent sub-periods, during which they have exhibited a positive impact on stock price. During the 2005-07 boom, higher pension contributions had a negative impact on stock price, while during the financial crisis contributions helped stock price—indicating that in times of stress investors value lower pension deficits.
f. Investors view pension deficits as riskier than corporate debt. While fixed income investors and rating agencies have tended to view pension deficits somewhat qualitatively as ‘soft debt’ that could be extinguished by asset returns over time, our analysis suggests the stock market views a dollar of pension deficit as worse than a dollar of debt, as Exhibits 6a and 6b show. Since pension deficits are inherently more volatile than corporate debt, this finding makes sense.
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley Research Department, and you should not regard it as a research report. Please refer to important information and qualifications at the end of this material.
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Exhibit 6a:Exhibit 6a: Pension Deficit vs. Stock Price, 2002-09
Sources: FactSet, Morgan Stanley
Exhibit 6b: Debt vs. Stock Price, 2002-09
$0
$20
$40
$60
$80
$100
0% 20% 40% 60% 80% 100% 120% 140%
Debt as a % of Market CapStock Price
Stock Price
$0
$20
$40
$60
$80
$100
0% 20% 40% 60% 80% 100% 120% 140%
Debt as a % of Market CapStock Price
Stock Price
Sources: FactSet, Morgan Stanley
Notes: 2370 observations from 2002-2009; 101 outliers were excluded. In a
multiple regression with projected EPS, pension deficit as a % of market
capitalization, and debt as a % of market capitalization, all variables were
statistically significant at the 99% confidence level. The coefficient for pension
deficit was 1.5 as large as the coefficient for debt, indicating that pension
deficits have a 50% greater impact on stock price.
III. Further Statistical Analysis: Pension Impact on Cost of Capital Stock Price
$100
a. Pension risk has a statistically significant relationship with equity beta. The bigger the pension, and/or the riskier its asset allocation, the higher the company’s equity beta.
Steeper slope For this section we updated analysis originally published in the Journal of Financial Economics, “Do a Firm’s Equity Returns Reflect the Risk of its Pension Plan?” by Li Jin, Robert C. Merton, and Zvi Bodie, 2006. We found the relationship between pension risk and beta was weaker from 2002-2009 than that found by Merton, et. al., during their study period of 1993-1998. Variations in data sources and methodologies (such as ERISA vs. GAAP data, domestic vs. global exposures) may explain some of the difference.
indicates greater impact
$0
80%
$20
100%
$40
120%
$60
Pension Deficit as % of Market Cap
$80
Our analysis measured the extent to which the pension beta impacts the equity beta of each S&P 500 company that has pension assets greater than 3% of its market capitalization.
0% 20% 40% 60%
Stock Price
b. Our results suggest pensions add 73bps to the weighted average cost of capital for the S&P 500, at the median. We found that for a 1.0 increase in pension beta, the firm beta increases by 0.38. In other words, slight increases in the equity weighting of a pension portfolio measurably increase the stock beta of the plan sponsor. Our results showed a weaker relationship than that found by Merton, et. al., in their work, which found that a 1.0 increase in pension beta causes approximately a 1.5 increase in firm beta. Data and methodology variations likely account for the difference. We found an r-squared of 28.8% and the overall results were statistically significant.
IV. Conclusion: What Companies Can Do
Our analysis implies companies can reduce the detrimental impact of pensions on their stock prices by taking some or all of the following steps, some of which may be counterintuitive:
1. Fund the pension, which should help stock prices more than paying down corporate debt. The funding could take any form, but our analysis implies even that funding the pension with corporate debt is a net positive for the stock price—because it replaces a more volatile form of debt (i.e., a pension deficit) with a less volatile form (i.e.,
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley Research Department, and you should not regard it as a research report. Please refer to important information and qualifications at the end of this material.
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This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley Research Department, and you should not regard it as a research report. Please refer to important information and qualifications at the end of this material.
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corporate bond or loan). More funding is probably better, as more risk would be reduced.
For pension-heavy companies, funding with common stock could be positive for the stock price despite the dilution—which, at first blush, is a highly counterintuitive result. For example, JC Penney’s contribution of common stock to its pension in May 2009 diluted its shareholders by 7.8%, but its stock was up 1.4% on the date of announcement (vs. S&P 500 decline of 0.2% that day). Within a year, JC Penney’s beta declined to 1.26 from 1.37, and S&P upgraded its credit rating despite a challenging retail environment. The transaction created value for JC Penney’s shareholders.
2. Reduce the pension liability, by changing the plan’s benefit structure, closing, freezing or terminating the plan, or accelerating lump sum payouts.
In 2012, when the IRS’s mandatory subsidy of lump sum distributions fully expires, companies will be able to settle their pension obligations by paying lump sum distributions with little or no incremental cost. Consequently, companies with substantial pension liabilities may begin in 2012 to make enhanced efforts to settle their pension obligations to eligible participants, which is the equivalent of paying down debt. Eligible participants include retiring employees; vested participants who no longer work for the company; or, in the case of a terminating pension plan, potentially all participants.
More companies are exploring potential plan terminations. Again, at first blush, this may seem counterintuitive in light of the historically low level of interest rates. However, the tail risks of pension plans are greater in low interest rate environments—because the present value exposure of extreme, long-term events is higher. The higher cost of tail exposures is partly why stocks are more sensitive to pensions today than during the prior funding crisis of a decade ago. Consequently, while plan terminations are more expensive amid low interest rates, the positive stock price impact of a plan termination is theoretically greater.
Companies should consider the potential for such strategic transactions in their long-term liquidity planning, since lump sums and plan terminations often require substantial liquidity.
3. De-risk the pension, though at present the impact of either funding the pension or reducing the pension liability is greater than de-risking the pension.
The authors would like to thank Chief U.S. Economist Dick Berner and his U.S. Economics Team for their contributions to this analysis.
Exhibit 7: Average US GAAP Funded Status of S&P 500 vs. Pension Liability Discount Rate, 1986-present
S&P 12/31 filers' funded status Citigroup 20-year discount rate (year-end)
US GAAP Funded Status (%) Discount Rate (%)
Sources: FactSet, Society of Actuaries website, Morgan Stanley. Note: To estimate mid-year results, we use the S&P 500 Total Return Index (SPTR) as a proxy for equity returns, the BarCap US Aggregate Index (LBUSTRUU) as a proxy for fixed
income returns, and a weighted average of both for “other” asset returns. Company disclosures are not sufficient to estimate such factors as returns on alternative asset classes or hedging gains.
E 9/30/10E
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
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Basic Materials: Companies with Defined Benefit Plans $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E*
Pension Pension Expected Return Employer Pension Employer Pension Pension Pension Pension Deficit as % of Pension Liability as % of
Company Plan Assets Plan Liabilities % Equities % Bonds % Other Discount Rate % on Assets % 10-K Date Contribution Contribution (Deficit)/Surplus Funded Status Mkt Cap at 10/15/2010 Mkt Cap at 10/15/2010
International Flavors & Fragrances Inc. 965.1 1,028.2 39.5% 50.9% 9.6% 6.10% 8.25% 12/2009 51.9 19.5 (63.09) 93.9% 1.6% 25.8%
2009 12/31/09
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
8
Basic Materials: Companies with Defined Benefit Plans (cont’d) $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E *
Pension P ension Expected Return E mployer Pension Em pl oyer P ension Pension Pension Pension Defi cit as % of P ension Liability as % of
Company P lan Assets Plan Li abi lities % E qui ties % Bonds % Other Discount Rate % on A ssets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Pension P ension Expected Return E mployer Pension Em pl oyer P ension Pension Pension Pension Defi cit as % of P ension Liability as % of
Company P lan Assets Plan Li abi lities % E qui ties % Bonds % Other Discount Rate % on A ssets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
9
Consumer Products: Companies with Defined Benefit Plans $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E * 12/31/09
Pension P ension Expected Return E mployer Pension Em pl oyer P ension Pension Pension Pension Defi cit as % of P ension Liability as % of
Company P lan Assets Plan Li abi lities % E qui ties % Bonds % Other Discount Rate % on A ssets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Revlon Inc. (Cl A) $405.6 $614.5 41.5% 36.1% 22.4% 5.68% 8.25% 12/2009 $23.3 $24.0 ($208.9) 66.0% 29.6% 87.0%
Al tria Group Inc. 4,870.0 6,075.0 74.0% 19.0% 7.0% 5.90% 8.00% 12/2009 37.0 50.0 (1,205.0) 80.2% 2.3% 11.7%
2009
Consumer Product s
2009 2010E * 12/31/09
Pension P ension Expected Return E mployer Pension Em pl oyer P ension Pension Pension Pension Defi cit as % of P ension Liability as % of
Company P lan Assets Plan Li abi lities % E qui ties % Bonds % Other Discount Rate % on A ssets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Revlon Inc. (Cl A) $405.6 $614.5 41.5% 36.1% 22.4% 5.68% 8.25% 12/2009 $23.3 $24.0 ($208.9) 66.0% 29.6% 87.0%
Al tria Group Inc. 4,870.0 6,075.0 74.0% 19.0% 7.0% 5.90% 8.00% 12/2009 37.0 50.0 (1,205.0) 80.2% 2.3% 11.7%
2009
Consumer Product s
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
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Consumer Products: Companies with Defined Benefit Plans (cont’d) $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E * 12/31/09
Pension P ension Expected Return E mployer Pension Em pl oyer P ension Pension Pension Pension Defi cit as % of P ension Liability as % of
Company P lan Assets Plan Li abi lities % E qui ties % Bonds % Other Discount Rate % on A ssets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Pension P ension Expected Return E mployer Pension Em pl oyer P ension Pension Pension Pension Defi cit as % of P ension Liability as % of
Company P lan Assets Plan Li abi lities % E qui ties % Bonds % Other Discount Rate % on A ssets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
11
Energy: Companies with Defined Benefit Plans $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E *
Pension Pension Expected Return Employer Pensi on Employer Pension P ension Pension Pension Defic it as % of P ension Li abi lity as % of
Company P lan Assets Plan Li abil ities % E quit ies % Bonds % Other Discount Rate % on A ssets % 10-K Date Contributi on Cont ri but ion (Defic it)/Surpl us Funded Status Mkt Cap at 10/15/2010 Mkt Cap at 10/15/2010
McDermott International Inc. $2,027.8 $2,806.7 53.5% 34.5% 12.0% 6.00% 7.83% 12/2009 $52.1 $168.9 ($778.9) 72.2% 14.1% 50.7%
Pension Pension Expected Return Employer Pensi on Employer Pension P ension Pension Pension Defic it as % of P ension Li abi lity as % of
Company P lan Assets Plan Li abil ities % E quit ies % Bonds % Other Discount Rate % on A ssets % 10-K Date Contributi on Cont ri but ion (Defic it)/Surpl us Funded Status Mkt Cap at 10/15/2010 Mkt Cap at 10/15/2010
McDermott International Inc. $2,027.8 $2,806.7 53.5% 34.5% 12.0% 6.00% 7.83% 12/2009 $52.1 $168.9 ($778.9) 72.2% 14.1% 50.7%
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
12
Financial Services: Companies with Defined Benefit Plans $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E *
Pension P ension Expected Return E mployer Pension Em pl oyer P ension Pension Pension Pension Defi cit as % of P ension Liability as % of
Company P lan Assets Plan Li abi lities % E qui ties % Bonds % Other Discount Rate % on A ssets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Pension P ension Expected Return E mployer Pension Em pl oyer P ension Pension Pension Pension Defi cit as % of P ension Liability as % of
Company P lan Assets Plan Li abi lities % E qui ties % Bonds % Other Discount Rate % on A ssets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
13
Financial Services: Companies with Defined Benefit Plans (cont’d) $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E*
Pension Pension Expected Return Employer Pension Em pl oyer Pension Pension Pension Pension Defi cit as % of Pension Liability as % of
Company P lan Assets Plan Li abi lities % Equi ties % Bonds % Other Discount Rate % on Assets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Pension Pension Expected Return Employer Pension Em pl oyer Pension Pension Pension Pension Defi cit as % of Pension Liability as % of
Company P lan Assets Plan Li abi lities % Equi ties % Bonds % Other Discount Rate % on Assets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
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Healthcare: Companies with Defined Benefit Pensions $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E* 12/31/09
Pension Pension Expected Return Employer Pension Employer Pension Pension Pension Pension Deficit as % of Pension Liability as % of
Company Plan Assets Plan Liabilities % Equities % Bonds % Other Discount Rate % on Assets % 10-K Date Contribution Contribution (Deficit)/Surplus Funded Status Mkt Cap at 10/15/2010 Mkt Cap at 10/15/2010
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
15
Industrials: Companies with Defined Benefit Plans $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E* 12/31/09
Pension Pension Expected Return Employer Pension Employer Pension Pension Pension Pension Deficit as % of Pension Liability as % of
Company Plan Assets Plan Liabilities % Equities % Bonds % Other Discount Rate % on Assets % 10-K Date Contribution Contribution (Deficit)/Surplus Funded Status Mkt Cap at 10/15/2010 Mkt Cap at 10/15/2010
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
16
Industrials: Companies with Defined Benefit Plans (cont’d) $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E* 12/31/09
Pension Pension Expected Return Employer Pension Employer Pension Pension Pension Pension Deficit as % of Pension Liability as % of
Company Plan Assets Plan Liabilities % Equities % Bonds % Other Discount Rate % on Assets % 10-K Date Contribution Contribution (Deficit)/Surplus Funded Status Mkt Cap at 10/15/2010 Mkt Cap at 10/15/2010
# All data combines 2009 10-K data for Stanley Works and Black & Decker Corp. The discount rate, asset allocation and expected return on assets reflect a weighted average of the two companies’ plans
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
17
Industrials: Companies with Defined Benefit Plans (cont’d) $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E* 12/31/09
Pension Pension Expected Return Employer Pension Employer Pension Pension Pension Pension Deficit as % of Pension Liability as % of
Company Plan Assets Plan Liabilities % Equities % Bonds % Other Discount Rate % on Assets % 10-K Date Contribution Contribution (Deficit)/Surplus Funded Status Mkt Cap at 10/15/2010 Mkt Cap at 10/15/2010
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
18
Media/Telecommunications: Companies with Defined Benefit Plans $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E*
Pension Pension Expected Return Em ployer Pens ion Employer Pension Pension Pension Pension Def ici t as % of Pension Liability as % of
Company Pl an Assets P lan Liabili ties % Equit ies % Bonds % Other Discount Rate % on Assets % 10-K Date Cont ribution Contribution (Defi cit )/Surplus Funded S tatus M kt Cap at 10/15/2010 M kt Cap at 10/15/2010
New York Times Co. (Cl A) $1,150.9 $1,901.8 69.0% 31.0% 0.0% 6.30% 8.75% 12/2009 $29.8 $108.0 ($750.9) 60.5% 61.5% 155.7%
Pension Pension Expected Return Em ployer Pens ion Employer Pension Pension Pension Pension Def ici t as % of Pension Liability as % of
Company Pl an Assets P lan Liabili ties % Equit ies % Bonds % Other Discount Rate % on Assets % 10-K Date Cont ribution Contribution (Defi cit )/Surplus Funded S tatus M kt Cap at 10/15/2010 M kt Cap at 10/15/2010
New York Times Co. (Cl A) $1,150.9 $1,901.8 69.0% 31.0% 0.0% 6.30% 8.75% 12/2009 $29.8 $108.0 ($750.9) 60.5% 61.5% 155.7%
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
19
Retail: Companies with Defined Benefit Plans $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E*
Pension P ension Expected Return Employer Pension Employer Pension Pension Pension Pension Defic it as % of Pension Liability as % of
Company P lan Assets Plan Liabil ities % Equit ies % Bonds % Other Discount Rate % on Assets % 10-K Date Contribution Contribut ion (Def ic it)/Surplus F unded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Pension P ension Expected Return Employer Pension Employer Pension Pension Pension Pension Defic it as % of Pension Liability as % of
Company P lan Assets Plan Liabil ities % Equit ies % Bonds % Other Discount Rate % on Assets % 10-K Date Contribution Contribut ion (Def ic it)/Surplus F unded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
20
Technology: Companies with Defined Benefit Plans $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E *
Pension P ension Expected Return E mployer Pension Em pl oyer P ension Pension Pension Pension Defi cit as % of P ension Liability as % of
Company P lan Assets Plan Li abi lities % E qui ties % Bonds % Other Discount Rate % on A ssets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Pension P ension Expected Return E mployer Pension Em pl oyer P ension Pension Pension Pension Defi cit as % of P ension Liability as % of
Company P lan Assets Plan Li abi lities % E qui ties % Bonds % Other Discount Rate % on A ssets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
21
Transportation: Companies with Defined Benefit Plans $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E *
Pension P ension E xpected Return E mployer Pension E mployer Pension Pension P ension Pension Defic it as % of P ension Liability as % of
Company P lan Assets Plan Liabil ities % Equit ies % B onds % Other Discount Rate % on A ssets % 10-K Date Contribution Contribut ion (Def ic it)/S urplus F unded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Pension P ension E xpected Return E mployer Pension E mployer Pension Pension P ension Pension Defic it as % of P ension Liability as % of
Company P lan Assets Plan Liabil ities % Equit ies % B onds % Other Discount Rate % on A ssets % 10-K Date Contribution Contribut ion (Def ic it)/S urplus F unded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
22
Utilities: Companies with Defined Benefit Plans $ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
2009 2010E*
Pension Pension Expected Return Employer Pension Em pl oyer Pension Pension Pension Pension Defi cit as % of Pension Liability as % of
Company P lan Assets Plan Li abi lities % Equi ties % Bonds % Other Discount Rate % on Assets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
CenterPoint Energy Inc. 1,432.0 1,866.0 18.0% 26.9% 55.1% 5.70% 8.00% 12/2009 20.0 9.0 (434.0) 76.7% 6.4% 27.5%
American Water Works Co. 695.5 1,128.2 71.0% 29.0% 0.0% 5.93% 7.90% 12/2009 85.8 82.8 (432.6) 61.7% 10.5% 27.3%
2009
Utililt ies
12/31/092009 2010E*
Pension Pension Expected Return Employer Pension Em pl oyer Pension Pension Pension Pension Defi cit as % of Pension Liability as % of
Company P lan Assets Plan Li abi lities % Equi ties % Bonds % Other Discount Rate % on Assets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
CenterPoint Energy Inc. 1,432.0 1,866.0 18.0% 26.9% 55.1% 5.70% 8.00% 12/2009 20.0 9.0 (434.0) 76.7% 6.4% 27.5%
American Water Works Co. 695.5 1,128.2 71.0% 29.0% 0.0% 5.93% 7.90% 12/2009 85.8 82.8 (432.6) 61.7% 10.5% 27.3%
2009
Utililt ies
12/31/09
Note: The above data for asset allocation may not match those disclosed in company filings, as new 10-K disclosure requirements meant asset classification was inconsistent from company to company. Sources: FactSet, 10-K reports, Bloomberg, Capital IQ. * as disclosed in most recent 10-K
2009 2010E*
Pension Pension Expected Return Employer Pension Em pl oyer Pension Pension Pension Pension Defi cit as % of Pension Liability as % of
Company P lan Assets Plan Li abi lities % Equi ties % Bonds % Other Discount Rate % on Assets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
American Electric Power Co. Inc. 3,403.0 4,701.0 54.9% 38.1% 7.0% 5.60% 8.00% 12/2009 8.0 160.0 (1,298.0) 72.4% 7.5% 27.3%
Pension Pension Expected Return Employer Pension Em pl oyer Pension Pension Pension Pension Defi cit as % of Pension Liability as % of
Company P lan Assets Plan Li abi lities % Equi ties % Bonds % Other Discount Rate % on Assets % 10-K Date Contribut ion Cont ribut ion (Defic it)/Surplus Funded Status Mkt Cap at 10/15/2010 M kt Cap at 10/15/2010
American Electric Power Co. Inc. 3,403.0 4,701.0 54.9% 38.1% 7.0% 5.60% 8.00% 12/2009 8.0 160.0 (1,298.0) 72.4% 7.5% 27.3%
$ in Millions; Ranked by 12/31/09 Pension Liability as % of 10/15/10 Market Capitalization
Utilities: Companies with Defined Benefit Plans (cont’d)
23
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