Pension return expectations under scrutiny
Nearly half of biggest companies too aggressive in forecasts under federal standards.
By MARY WILLIAMS WALSH
The New York Times
The first comprehensive examination of the pension funds of the nation's biggest corporations shows that nearly half made assumptions about their investment returns for 2002 that would be deemed too aggressive by federal regulators starting this year.
Of the 100 companies examined, 44 assumed an annual rate of return of more than 9 percent, the proposed standard for this year. Eight of the companies assumed that their pension funds had returns of 10 percent or more. In fact, though, all of the pension funds lost money last year.
The companies that used the highest estimates included Northwest Airlines, General Motors and Honeywell International.
The optimistic assumptions about returns on pension fund investments translated into billions of dollars for corporate America's collective bottom line in 2002, according to the study, by the actuarial firm of Milliman USA.
During the stock market boom, when pension funds were growing steadily each year, these assumptions did not prompt much concern. Because pension funds invest for the long term, and may experience short-term fluctuations, an assumed rate of return provides a way to smooth out the impact on the company's financial performance.
"I've had more questions on the assumed rate of return in the last six months than I had for 15 years before that," said John W. Ehrhardt, a consulting actuary and principal of Milliman and author of the new study. "The auditors are looking at this much more closely. Nobody, in the post-Enron environment, wants to have any questions asked about their financial statements."
The Milliman survey showed that America's biggest companies last year assumed an average rate of return of 8.92 percent for their pension investments. Ehrhardt said many companies are lowering their assumptions for 2003.
"I wouldn't be surprised to see an average of 8.5 percent," he said, adding that he considers that rate "reasonable," given historic investment trends.
Accounting rules do not offer companies detailed instructions for picking each year's rate, but the rates should reflect historic investment performance of the types of assets in their pension funds.
Berkshire Hathaway, which has been widely praised for its realistic pension accounting techniques, used an assumed rate of return of just 6.5 percent, the second-lowest of the 100 companies surveyed. Only Merrill Lynch was lower, with a 6 percent rate of return.
The study used data taken from the companies' 2002 financial reports, which calculate pension activity with methods designed to show general trends to investors. These calculations differ from those used to show employees and retirees whether their companies are setting aside enough to pay their pensions.
Ehrhardt said the pension deficits underscored by the survey were not a sign of any impending pension defaults by the companies. "I don't think this is a benefits-security issue yet," he said.
Rather, Ehrhardt said, the study offered strong evidence that growing numbers of companies will have to make substantial cash contributions to their pension funds in the coming months. He said these looming contributions shouldn't cause consternation among investors, except for companies that are not generating enough cash to cover the mandatory payments.
"A pension plan is a very good benefit, and companies should expect to have to pay for it," he said.
Ehrhardt also said that as companies bring their assumed rates of return in line with the realities of the securities markets, corporate bottom lines are apt to be reduced, because some of the illusory profits that accounting rules permit will melt away.
Starting this year, federal regulators have said they will audit the financial statements of any companies that use rate-of-return assumptions greater than 9 percent for their pension funds. Any company unable to convince the auditors that a higher rate is valid will be required to restate earnings.
General Motors, which has America's largest corporate pension fund, used an assumed rate of return of 10 percent last year and will use 9 percent in 2003, a spokesman said. |
