WASHINGTON - Pension plans contributed more than $5 billion to the pre-tax income of companies in the DJIA last year.
All 25 of the companies in the benchmark Dow Jones industrial average that offer defined benefit pension plans saw their pension income grow or their pension expense shrink last year.
As a group, the 25 plans contributed a sizable $5.3 billion to the pre-tax income of their corporate parents last year. That's an eye-popping 278.6% increase from 1999.
(Accounting rules require companies to report their pension liabilities or pension surpluses in their annual financial statements, and to book the cost of providing pensions in the latest fiscal year in their income statements. For several years, many of the nation's largest companies have generated pension income instead of costs, boosting their bottom lines even as profits from underlying operations have sometimes decreased.)
Boeing Co.'s pre-tax earnings, for example, dipped to around $3 billion in 2000 from $3.3 billion the previous year. Yet its pension income more than tripled, to $428 million from $125 million in 1999, contributing a hefty 14.3% to the company's pre-tax income in 2000. The aircraft manufacturer's pension income contributed a mere 3.8% to the bottom line in 1999.
"We had a sustained period where actual returns have exceeded what the expected returns were ... so as we recognize it on our books, it is generating pension income," a Boeing spokesman said. The company could be "recognizing the gains for many more years to come."
And International Business Machines Corp.'s pension income from its domestic and overseas pension funds jumped to $1.3 billion last year from $706 million in 1999, even as its operating pre-tax income dipped to $11.5 billion from $11.8 billion. As a consequence, IBM's pension funds contributed about 11% to the company's pre-tax earnings, up from 6.8% in 1999.
More pension income
Other companies with big increases in their pension income were General Electric Co., whose pension income grew 21% to $1.7 billion from $1.4 billion; AT&T Corp., up a hefty 82% to $767 million from $422 million; and SBC Communications Inc., up 36% to $1.15 billion from $844 million. At the same time, Exxon Mobil Corp.'s worldwide pension expense shrank 89% to $76 million from $706 million in 1999.
Moreover, the 25 companies in the DJIA that sponsor pension funds had an average return of 7% on their pension assets and a median return of 1.9% (calculated using the traditional reporting method used by actuaries that assumes benefits were paid during the middle of the year). In comparison, the stock prices of the companies sank 0.7% in 2000.
Still, pension income couldn't cushion the nation's blue-chip companies' stock prices against a beating.
"We have seen a market when some of these stock prices came off severely, despite the fact that the pension component of earnings was going up. That suggests that there are factors much more important than pension income driving investors' expectations and the changes in those expectations," said Keith Ambachtsheer, president of K.P.A. Advisory Services Ltd., a Toronto-based pension research and consulting firm.
Jeremy Gold, an independent New York-based actuary, agrees.
Pension income "doesn't provide useful information about a company's business," he said. For example, IBM's increase in pension income in 2000 does not tell investors how successful the company will be in selling computers, he noted.
Get some credit
Although securities analysts generally discount the pension earnings when evaluating the prospects of companies, they do give companies with overfunded pension plans some credit for the surplus. This is especially true in the telecommunications industry where most companies have overfunded pension plans. In the case of SBC, that amounts to $4.50 per share, said Bill Deathrage, a telecommunications analyst at Bear Stearns Cos. Inc. in New York. "It is one of the things that investors look at when they get the annual reports each year," he noted.
SBC Communications officials were not available to comment.
The huge jump in pension income might, at first, seem surprising against the backdrop of the stock market's slide and the decline in interest rates last year. It basically is a reflection of the huge gains pension funds have built up over the years of the bull market.
Financial Accounting Standard 87, which dictates how companies must disclose their pension liabilities in their financial statements, allows firms to spread out their better-than-expected investment returns on their pension assets over several years, so that companies were able to take some of this "actuarial gain" into account in calculating their pension income for 2000.
Moreover, the accounting rules aim to minimize volatility caused by the impact of pension liabilities on the bottom line by requiring companies to take into account the expected, rather than actual, rate of return on pension assets in computing their pension expenses or pension income. As a result, many companies reaped the benefits of the stratospheric returns on their assets in 1999 that caused their year-end assets to inflate hugely. That, in turn, resulted in a bigger expected rate of return in 2000 because it was based on the inflated assets.
Any decline in pension assets last year caused by the stock market's bumpy ride won't show up until the 2001 financial statements are published.
Seven of the 25 DJIA companies with defined benefit pension funds - Eastman Kodak Co., E. I. Du Pont de Nemours & Co. Inc., IBM, J.P. Morgan & Co., Procter & Gamble Co., American Express Co. and United Technologies Corp. - actually raised their assumed rates of return. One, Walt Disney Co., lowered its return assumption to 10% in 2000 from 10.5% in 1999. The average assumed rate of return on pension assets for the DJIA companies was 9.34% in 2000, up from 9.25% in 1999.