Feathering the Nest Egg

Pension surpluses are a boon to corporate bottom lines. But are efforts to expand them going too far?

These sure seem like good times for pension plan assets. Thanks mainly to the long bull market, many corporate plans are brimming with surpluses. Sherwin- Williams Co., for example, has pension plan assets almost three times greater than its pension obligations. General Electric Co.’s pension assets of $50 billion are nearly double its liabilities. And the pension plans of Bank of New York, Westvaco, and Cincinnati Financial Corp. are also overfunded by nearly 100 percent, according to Bear, Stearns & Co.’s 1998 estimates.

And thanks to the prevailing accounting methodology, a significant portion of those surpluses are boosting corporate bottom lines. According to Bear, Stearns, 25 percent of the companies in the S&P 500 reported income from their defined benefit plans in 1998. And for 15 of those companies, including USX­US Steel, Unocal, Northrop Grumman, Westvaco, and Peoples Energy, pension income represented 10 percent or more of total 1998 operating income. In fact, says Jack Ciesielski, publisher of The Analyst’s Accounting Observer, for many companies, “pension plans–in their ability to contribute to earnings–are becoming almost as significant as operating assets.”

It’s no surprise, then, that more and more corporations are devising new ways to preserve and expand their pension surpluses. Such efforts have included everything from lobbying for legislative changes to reducing pension benefits to, most recently, Bank of America’s novel idea of channeling 401(k) monies into defined benefit plans.

But some analysts contend that using pension surpluses to boost earnings distorts financial reality. For one, the growth rates are not sustainable. “You can do these things, but only for so long,” says Ashwinpaul “Tony” Sondhi, president of A.C. Sondhi & Associates, a financial advisory firm in Maplewood, New Jersey, and chairman of the Financial Accounting Policy Committee of the Association of Investment Management and Research. For another, the earnings aren’t real. Because of Employee Retirement Income Security Act (ERISA) requirements, a company can’t access the assets in its pension plans for purposes other than providing benefits to plan participants. “It cannot use this money to finance capital projects, to buy back stock, or to pay dividends,” says Ciesielski. “It does nothing to increase or decrease cash flow.”

Moreover, the mushrooming surpluses–which have to be fully disclosed only in the footnotes of a company’s annual report–have raised the ire of the Securities and Exchange Commission, which is taking a hard look at broadening pension disclosure requirements. In addition, labor unions and retirees, concerned about the lengths to which companies will go to increase the surpluses, are reviving debate over the proper use of pension plan assets. Little wonder, then, that some analysts are wondering if the surpluses might be too much of a good thing.

Multiple Options

That hasn’t stopped efforts to expand the surpluses, however. On Capitol Hill, the Senate is considering a bill that would repeal the limits on deductible employer contributions to pension plans. A similar version passed in the House of Representatives in July. But whether a final version will pass muster with the Clinton Administration remains to be seen.


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