comments from Jim Grant, of Grant's Interest Rate Observer
"Corporate America, though it has supposedly sworn off
make-believe, continues to imagine that it is better at
investing than, say, Warren Buffett," writes Jim Grant.
"Twenty-five of the 30 companies in the Dow Jones
Industrial Average sponsor defined benefit pension plans,
and the 25 therefore disclose their assumed long-term
rates of return on invested pension assets. What they
expected for 2001 was an average return of 9.4%. What they
achieved was an average of minus 7%."
- Obviously, they're losing money again in 2002.
Eventually, however, a poorly performing pension fund will
force a company to lower its return assumptions (which lowers
earnings) AND kick in more cash to the plan.
- "General Motors provides a sobering case study in the
deterioration of corporate actuarial positions," Grant
continues. "On the company's July 18 conference call, CFO
John Devine disclosed that GM's pension fund had recorded
a minus 3% return through midyear. Bullishly assuming a
flat return for the full year and a 10% annual return from
2003 through 2007 (from his lips, etc.), Devine said that
GM would, nonetheless, need to inject $6 billion into the
fund over the five years. Assuming an 8% annual return
from 2003 through 2007, the company would have to add $9
billion.
- Therefore, unless the stock market bounces back
dramatically, pension plans will start weighing on
corporate earnings and cash flow. |
