| NEW YORK
NEW YORK Oct 13 A little-noticed change in
corporate pension funding rules could help more U.S. companies
beat their earnings estimates this quarter at the expense of
higher costs down the road.
In September 2015, the U.S. Securities Exchange Commission
adopted new rules that allow companies to opt for a so-called
spot rate approach, which essentially allows them to get a
short-term decline in service and interest costs in exchange for
recognizing more of their defined benefit pension payments over
The drop in pension costs among the 210 companies that have
adopted the new approach has boosted pre-tax earnings by an
average of 2.6 percent this year, said David Zion, an analyst at
At 10 companies, including United Technologies Corp,
PepsiCo Inc, General Mills Inc and 3M Co
, pension savings have accounted for more than 50 percent
of their earnings growth over the last year, Zion said.
Overall, S&P 500 companies are expected to show that
earnings slipped 0.7 percent in the third quarter, according to
Thomson Reuters estimates.
While pension-related gains are "not too shabby in the
current environment," investors should be wary because these
"low-quality" earnings do not reflect any gains in the
underlying fundamentals of a business, Zion said.
"It's when times get tough that companies tend to push the
envelope," Zion said.
Few analysts and fund managers focus on pension costs as
part of their analysis of a company, and most companies do not
discuss their pension-funding plans on quarterly earnings calls.
PepsiCo, for instance, reported earnings per share 6.4
percent higher than analyst estimates in its most recent
results, according to StarMine data. General Mills, meanwhile,
reported earnings per share 3.6 percent higher than consensus
"We really don't take that into consideration at all" said
one portfolio manager who did not wish to be identified by name
who has a significant position in Ashland Global Holdings Inc
, a company that Credit Suisse expects will get a roughly
15 percent in earnings this year after adopting the spot-rate
Not every company that has adopted the spot-rate approach
has been successful in keeping its costs at bay.
Shares of Alcoa Inc, which saw a 40 percent boost to
its pre-tax income over the last year after adopting the new
funding approach, fell nearly 15 percent after the company
missed estimates and said it had reached an agreement with U.S.
pension insurer Pension Benefit Guaranty Corp. The company will
improve its funding status by making $150 million in additional
payments over the next 2-1/2 years.
(Reporting by David Randall; editing by Grant McCool)