The pension laws allow companies to estimate the growth rate of their pension assets, and chalk up the estimates as real earnings in their reported earnings. Therefore, high estimates of internal growth of the assets (which are mostly invested in stocks) allows the companies to fund the plans with less cash, and to puff up the 'E' in their P/E.
... But only for a period of time.
Some 360 companies in the S&P 500 use Defined Benefit Plans... where they have committed to paying out a fixed benefit level to their retirees.
Many of these companies are maintaining 'fictional' assumed rates of return for the assets in their pension plans... often 8 1/2, 9, and 10%.
This was great for them during the '90s, when most of their plans met or exceeded these assumed rates of return... and this injected great gobs of cash into the companies earnings, supporting higher stock prices.
But for three years now, most of these plans have had declines on their assets... but the companies have still been projecting these 'fictional' 9 and 10% rates of return going forward, allowing them to artificially prop-up the earnings numbers they report.
This game of 'inflate the reported earnings' can only occur for so long before pension plan regs require cash injections into the plans to 'top them off'.
This is happening now, and will continue for many years.
If these 360+ companies with defined benefit plans were forced to mark-to-market the assets in their plans (as the feds are considering), 90+ of them all would have HUGE reportable losses.
For one example: the difference between GM's pension plan obligations, and the assets it actually has in the plan... is GREATER than the entire market cap of all GM stock.
By this measure, GM's stock should be essentially worthless, as it's entire value is really 'owned' by it's retirees... who have a higher secured claim on the company than the stock or bond holders.
Most of the US steel industry is in the same shape (as are many old-line companies with large pension obligations). Much of Europe is in even WORSE shape with under-funded pension plans.
I regard the 'under-funded pension plan problem' as the major illness affecting the 'Fortune 500 style' companies... and the 'stock option / stock watering' pyramid scam as the major problem over-hanging the Nasdaq companies.
BOTH financial frauds result in 'fictional' reported earnings.
(Still, neither is near the magnitude of the federal government's fraudulent accounting :( |
