Peanuts and Pensions

In case you missed it, Kraft Foods Group Inc. ("Kraft") reported a fourth quarter 2013 increase in profit and a $1.11 per share accounting gain, due in part to its pension plan. Higher discount rates and bigger returns on its portfolio were cited factors, with a nod to the company's use of "some of the cost savings to boost marketing behind brands like Jello-O dessert and Planters peanuts." See "Kraft Net Soars on Pension-Related Gain" by John Kell (Wall Street Journal, February 13, 2014). Other news, straight from its earnings call, describes the use of roughly $600 million of the company's free cash flow to add contributions to the pension plans in 2013. The result is a rise in the funded ratio to 96 percent at calendar year-end, up from 77 percent one year earlier. Expected contributions for 2014 will run around $200 million, with $60 million of that number representing required cash to fund Kraft's Canadian pension plans. See "Q4 2013 Earnings Call Transcript," February 13, 2014 and "Kraft Foods Group Reports Fourth Quarter and Full Year 2013 Results," February 13, 2014. Noteworthy is that Kraft commenced a liability-driven investment ("LDI") strategy, to be phased in over multiple years, (and I am paraphrasing here) as a way to more appropriately line up "pension assets with the projected benefit obligation to reduce volatility" by moving towards an 80% fixed income, 20% equity securities mix. See page 62 of the latest Kraft 10-K filing.

This alert from Kraft is yet another example of the link between pension management and corporate finance. There are lots of other companies that have made similar declarations about the relationship between employee benefit plan economics and company operations. As I wrote in "Pension risk, governance and CFO liability" by Susan Mangiero (Journal of Corporate Treasury Management, 2012), private sector plan sponsors are acutely aware of the economic and legal aspects of offering ERISA plans to their respective work force. A dollar paid by shareholders for benefits could be seen as a cost that takes away from growing the enterprise or an investment in happy workers who add to the bottom line. Either way, the Treasury and Investor Relations teams are increasingly involved in discussions and related action steps to address the management of retirement plans. This is no coincidence. Liquidity, enterprise risk management, valuation, shareholder relations, talent retention and capital adequacy are a few of the numerous touch points that bring together the worlds of Human Resources ("HR"), the board and C-level officers such as the CEO and the Chief Financial Officer. This trend is unlikely to go away any time soon. To the contrary, expect more interactions across company functions and around the world.

To read a related blog post, see "Pension Risk, Governance and CFO Liability," PensionRiskMatters.com, March 4, 2012.