earlie,
man, I just love this bull market! did you see this from the WSJ today?
great quote:
<<Indeed, while no company ever cites profits as a reason for a pension switch, many companies with overfunded pension plans are changing their plans, frequently with the result that future benefits become less generous. Next month, for instance, International Business Machines Corp. will convert its overfunded pension plan to a variety that will provide lesser benefits for many older workers -- and that will render the plan even more overfunded.
"It's important to know that we're not making this change to save money," IBM told employees on a Web site. But after IBM makes the change, the pension credit the company records on its income statement is expected to jump by $200 million, to roughly $654 million for 1999.>>
interactive.wsj.com
June 15, 1999
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Overfunded Pension Plans
Fatten Companies' Earnings
By ELLEN E. SCHULTZ
Staff Reporter of THE WALL STREET JOURNAL
Shareholders of General Electric Co. were pleased to see it turn in another banner year in 1998, with strong contributions to earnings from many different parts of the company. That includes one part they might not have thought of: its pension plan.
Of GE's 1998 pretax profit of $13.8 billion, its pension plan provided more than $1 billion.
Pension plans as a boon to the bottom line? Those same pension plans that used to be a financial burden for many companies, and were so often underfunded? Yes, and not just at GE but at many other big American companies, too.
Chalk up one more minor miracle for the amazing 1990s bull market.
Like many pension plans, GE's has grown fat as the stock market in which it is heavily invested has rolled on. It is overfunded, far in surplus. GE couldn't withdraw this surplus without paying a stiff excise tax, enacted in 1990 to put a stop to the pension raids of the 1980s.
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Pension Payoff
Large pension surpluses can generate 'pension credits' that flow to the companies' income statements, boosting earnings. These are the U.S. companies with the largest pension surpluses. Figures are for fiscal 1998, in millions.
Total
pension
assets Pension
surplus Credit
to income
statement
General Electric $43,477 $15,875 $1,016
Bell Atlantic-a 37,022 8,886 627
Lucent Technologies-a 36,191 8,345 558
GTE-a 17,949 9,160 473
IBM-a 66,887 8,278 454
BellSouth-a 17,983 4,479 259
SBC Communications-a 27,031 8,161 239
Ameritech-a 14,762 6,077 225
Boeing-a 32,609 3,722 121
U S West-a 12,925 3,303 101
Lockheed Martin 22,811 4,665 80
AT&T-a 20,513 6,032 0-b
a-Cash balance or similar hybrid plan, by year-end.
b-Company did not take a pension credit in 1998, but used $2 billion in surplus for severance benefits.
Source: company filings
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But thanks to an accounting rule that is little known to either shareholders or analysts, and that was written for a very different era, there is a way to gain from the pension surplus. The rule provides that if investment returns on pension assets exceed the pension plans' current costs, a company can report the excess as a credit on its income statement. Voila: higher earnings.
Getting Credit
It's happening at a lot of companies, and the amounts are substantial. Bell Atlantic Corp.'s pension plan produced a $627 million pretax credit for the company's 1998 income statement. GTE Corp. reaped a $473 million pretax credit. Caterpillar Inc. scored a $183 million credit.
At Northrop Grumman Corp., 40% of first-quarter pretax profit was attributable to the overfunding of the pension plan. USX-US Steel Group would have reported a first-quarter loss except for its overfunded pensions.
One might think that for employees, the overfunding of plans would be good news; there would be at least a chance that the company would improve their benefits. But in fact, the incentives for companies are quite different. If a small pension surplus is a boon to the bottom line, a bigger surplus is an even bigger boon.
And one way to make the surplus bigger is to reduce benefits.
Indeed, while no company ever cites profits as a reason for a pension switch, many companies with overfunded pension plans are changing their plans, frequently with the result that future benefits become less generous. Next month, for instance, International Business Machines Corp. will convert its overfunded pension plan to a variety that will provide lesser benefits for many older workers -- and that will render the plan even more overfunded.
"It's important to know that we're not making this change to save money," IBM told employees on a Web site. But after IBM makes the change, the pension credit the company records on its income statement is expected to jump by $200 million, to roughly $654 million for 1999.
Genesis in '80s
How did this party get started? The roots lie in an accounting rule change, which took effect for large employers in 1987 and smaller companies a little later. The Financial Accounting Standards Board was concerned that corporations weren't reporting their pension obligations in a uniform way. It required companies to start recognizing them on their income statements by recording a liability. With much grumbling, companies complied.
But soon, the unexpected happened. The stock market started moving relentlessly upward. And the pension funds' managers shifted more of their assets into stocks, raising the share from less than half to about 60% today. Assets in the plans mushroomed.
Liabilities didn't keep pace. Many companies were shrinking both their work forces and their pension benefits. The result was the birth of some gargantuan pension-plan surpluses. The 10 U.S. corporate pension plans with the largest surpluses have combined surpluses of more than $100 billion.
The pension-fund surpluses are proving valuable to companies in other ways. For one thing, they can be spent on employee-related costs that companies otherwise would have to pay from cash flow, such as disability benefits, certain profit-sharing contributions or part of the cost of top executives' benefits. DuPont Co., for instance, uses about $250 million a year of its pension-fund surpluses to pay for retiree health costs.
And companies can use the money in overfunded pension plans to pay for staff "downsizings," as AT&T Corp. did last year. When 15,300 of its managers accepted a buyout package, AT&T used $2 billion of pension-plan surpluses to pay for the packages. An added tax break kicks in when this happens: The money is exempt from Social Security and Medicare payroll tax, saving employers and employees about 7.65% each.
"For years, people saw the pension as this bucket of money you can't touch," says Thomas Henritze, director of benefits accounting at US West Inc., which had $101 million in pension credits in 1998, and, in addition, was able to use $55 million in pension surplus to pay for retiree medical costs. "Companies are looking to not leave the asset dormant, but use it to deliver better returns for the company."
For certain companies, such as those deep in debt or involved in acquisitions, the 1980s strategy of terminating a pension plan and mining its assets can still be alluring, partly because they can dodge a lot of the excise tax. However, most companies now are content to let the pension-plan surpluses pile up.
Indeed, so valuable are large, overfunded pension plans to companies that employer groups are lobbying for ways to get more money into them. Current law doesn't let companies deduct contributions to pension plans once the level of assets reaches 150% of the plans' liabilities, with the result that many corporations are on a contribution holiday. GE hasn't contributed to its pension plan since 1987 (although employees are required to contribute; they put in $112 million last year).
Employers have already successfully lobbied to get the ceiling gradually raised in coming years, and Wednesday the House Ways and Means Committee is expected to consider a proposal to raise it still further. Another bill would pave the way for companies to contribute more to their pension plans on behalf of high-paid employees; currently, such contributions aren't deductible on salaries beyond $160,000 a year.
Adding Employee Money
Employers also are looking for ways to feed more employee money into already-overstuffed pension plans. That even includes employees' 401(k) money, such as happened when NationsBank and BankAmerica merged.
At BankAmerica's invitation, NationsBank employees transferred $1.4 billion of their 401(k) money into the BankAmerica pension plan. That nearly tripled the pension plan's surplus, to $1.3 billion. The transfer helped produce a pension credit for the merged company, called Bank of America Corp., says Chuck Loring, a senior vice president. "To the extent that we have pension income instead of pension costs, it improves our earnings," he says.
Still, the more common way to beef up pension assets is to reduce benefits. GE, it should be noted, hasn't done so; in fact, prodded by its unions, it has sometimes improved pension benefits. But many companies are converting their pension plans to what are called cash-balance plans, which can reduce benefits for older employees who otherwise would have seen their pension credits build up rapidly in their last working years. In cash-balance plans, each employee has a theoretical pension balance, to which the company makes an annual donation and which the company treats as growing by a fixed percentage each year.
And by cutting that fixed percentage, some companies with cash-balance plans further cut pension liabilities. For instance, AT&T will slash to 4% from 7% the gain it credits annually to employees' pension balances, starting after 2001.
IBM's Surplus
Switching to cash-balance plans has fattened many pension-plan surpluses. Of the 12 pension plans with the largest surpluses, 10 are cash-balance-type plans or will be by year end. It is such a switch that is expected to bestow the extra $200 million in credits on IBM's income statement this year.
In the past, moves that reduced pension benefits often were resisted by top executives, because they didn't want their own pensions cut. But now, they have so-called top-hat plans that make up the difference. For example, proxy statements show that after Banc One Corp. and Dana Corp. converted to cash-balance plans, supplemental executive retirement plans were revised to make sure top managers got the better benefit available in the old system.
In addition, since executive compensation increasingly is tied to corporate earnings targets, pension surpluses that boost a company's bottom line can boost what top managers earn, too.
Retirees' Complaint
Pension-plan overfunding has not, however, prompted companies to give more benefit increases to retirees -- quite the reverse. In the early 1980s, 60% of large companies provided regular cost-of-living increases for pensioned retirees; today, with the plans in better financial shape, fewer than 4% do. GE last did so in 1996.
At GE's April shareholders' meeting in Cleveland, Chairman John F. Welch autographed annual reports for pleased investors. "You've made me rich," one woman told him. But about 100 retirees made a plea for an increase in their pensions, noting that GE's $43 billion pension plan currently is overfunded by $15.9 billion, the biggest surplus in corporate America.
Helen Quirini of Schenectady, N.Y., who is 79 years old and worked at GE for 39 years, spoke up. She retired in 1980 and doesn't recall her final pay level, but she said that her pension is $576 a month. "Our pension fund has a huge surplus, and it is a shame that such pitiful pensions are still being paid to earlier retirees," Ms. Quirini said.
The retirees, without being specific in their request, asked shareholders not to approve a proposed increase in pensions for GE directors without also giving one to retirees. Mr. Welch replied that market fluctuations might reduce the pension plan's assets, so it would be risky for the company to provide the many retirees an increase.
Shareholders approved a 50% increase for directors with five years' service, raising their pensions to $75,000 annually. |
