WASHINGTON - As the economy sputters and corporate profits shrink this year, the nation's largest companies are expected to rely even more on their pension funds to boost the corporate bottom line.
Pension plans bolstered the profits of large U.S. corporations by nearly $20 billion in 2000, despite the stock market's dismal performance, and are expected to prop up profits by about $22 billion this year. They contributed $12.7 billion to the bottom lines of large corporations in 1999.
That's according to a new study by two economists at the Board of Governors of the Federal Reserve System in Washington, who found that pension funds contributed 2.5% to profits of their sponsoring companies in 1999, and 3.5% of profits last year. And even though the economy is slowing and the stock market is in a funk, pension funds are expected to contribute a sizable 4% to corporate bottom lines this year, and a similar percentage next year.
The study by Federal Reserve economists Julia Coronado and Steve Sharpe reinforces the need for investors to peer closely at companies' financial results to determine if profits are coming from corporate operations or from the pension fund.
Pension fund coffers swelled in the mid- and late 1990s thanks to the spectacular stock market. Because accounting rules permit corporations to spread out the gains by their pension funds over as many as five years, pension funds are continuing to benefit from their investments in the stock market, even though the market is now spiraling downward.
Ms. Coronado and Mr. Sharpe analyzed data from the 350 companies in the Standard & Poor's 500 stock index that have defined benefit pension plans.
Because of the stock market, pension costs for the companies, on the whole, fell by $10.4 billion in a five-year period, from $9.4 billion in 1995, to $1.0billion in 1999. Pension costs comprise the sum of the cost of benefits earned in the current year, the interest expense on the deferred benefits and the assumed return on pension plan assets.
Companies in the study assumed, on average, that they would earn about 9% on their pension assets in each of the five years from 1995 through 1999. Their actual earnings were on average 16%, or a hefty percentage points above what they hoped to earn.
"By our estimates, the excess returns earned since 1995 more than account for the decline in net pension costs," the authors wrote.
The study anticipated that the pension funds in the study would have reported no earnings last year, and 6% this year and in 2002.
And, pension costs for the group would have fallen even more sharply had some of the companies not instituted huge layoffs and early retirement programs that sopped up billions of dollars in pension profits. For example, the group reported pension costs of $5.8 billion in 1998, but its costs would have been only $1.8 billion had it not been for costly layoffs and early retirement programs by just three companies, AT&T Corp., Bell Atlantic Corp. (now Verizon Communications Inc.) and Ford Motor Co. Those programs increased pension costs by nearly $4 billion in 1998 alone.
"Those were pretty hefty chunks, and if you took those out, (pension costs) would have been even lower," Ms. Coronado said.