More funds reporting surpluses again

WASHINGTON — Pension surpluses are making a comeback.

As many as 40 of the nation's largest corporations are expected to have had more assets than needed to pay benefits in 2003, a 20% increase from a year earlier.

An early analysis of the annual financial reports of companies in the S&P 500 that sponsor defined benefit plans shows that 23 of 158 reported pension surpluses for 2003. Data on 17 of the companies that reported surpluses in 2002 were not available at press time, but it is expected that many, if not all, of those will also be in the black for 2003.

Nine of the companies that reported surpluses last year were underfunded in 2002, including six in the financial sector — Citigroup Inc., J.P. Morgan Chase & Co., SunTrust Banks Inc., Lehman Brothers Holdings Inc., BB&T Corp. and U.S. Bancorp.

"The stock market obviously helped," said Howard Silverblatt, an equity analyst at Standard & Poor's, New York, who performed the analysis. The companies analyzed so far had an average 64% exposure to equities.

"The turnaround in interest rates at the end of the year also helped a lot," he added, noting that interest rates have since dropped and the stock market is flat, so the investment performance of pension funds in the first quarter of 2004 will probably have deteriorated.

"If you have a 20% return (on pension assets), it can move you from negative to positive funded status quite easily," observed Adam Reese, an actuary and senior consultant with the Hay Group, Arlington, Va.

Many companies could see the benefits of last year's turnaround in the market for several years. That's because pension funds have nearly two-thirds of their pension assets invested in stocks, and they are required to spread out the gains or losses they incur compared with their assumed rates of return.

Contributions also helped some of the nation's largest corporate pension plan sponsors get back in the black.

Mr. Silverblatt estimates that the 356 companies in the S&P index with defined benefit plans will have contributed an estimated $50 billion to their funds in 2003. They contributed $49 billion in 2002, and $15 billion in 2001, said David Zion, an accounting analyst at Credit Suisse First Boston in New York.

Some won't be making contributions this year after making hefty ones last year. One example is General Motors Corp., New York, which contributed $18.5 billion in 2002.

GM's $86.1 billion pension fund had a $300 million surplus at the end of the year, under the calculations it made for funding purposes. But it still reported a $1.1 billion shortfall under the accounting rules that govern pension disclosures in annual reports.

Weyerhaeuser Co., Federal Way, Wash., also returned to the black, reporting a surplus of $200 million last year, after incurring a $400 million shortfall in 2002.

The company doesn't plan to make any contributions this year, although it reported a pension expense of $48 million in 2003, and it expects to report a $40 million pension expense this year, said Kathryn McAuley, a company spokeswoman.

"We had been overfunded going into the market downturn, and over the 20-year period were one of the top-performing pension funds, so the reversal of the market was beneficial to us," she said.

The forest products company had 60.4% of its $4.3 billion pension assets in hedge funds, private equities and other alternative investments last year. A year earlier, it had 75.5% of its assets in alternatives.

Other companies' surpluses increased. One example: Verizon Communications Inc., whose pension fund had $768 million in excess assets at the end of 2002, widened its surplus to $1.8 billion at the end of 2003.

New York-based Verizon, with $42.8 billion in pension assets, reported the improved results even though it decreased its equity exposure last year, to 55.9% from 59.6% in 2002, but the company increased its exposure to "other" assets classes by 10 percentage points.

Even companies that continued to report a shortfall narrowed their deficits.

E.I. du Pont de Nemours & Co. Inc., for example, had a $3.2 billion shortfall on its $17.9 billion pension fund last year, compared with $2.6 billion in 2003.

"It was a good year," said Ken Porter, chief actuary at the Wilmington, Del.-based chemicals manufacturer. The company's pension fund — which was 63% invested in equities in 2003 — earned $3.4 billion on plan assets, compared with the $1.4 billion it had expected to earn, according to the annual report. The company had assumed it would earn 9% on assets, down from 9.5% the previous year.

While most companies heeded the Securities and Exchange Commission's call last year to lower their assumed rate of return to 9% or lower, the impact of that reduction won't show up on their reported financial results until 2004.

For years, Weyerhaeuser had assumed it would earn 11.5 % on its pension assets, the highest assumption of companies in the S&P 500. But in 2002, the company lowered its expected return to 10.5%, and to 9.5% in 2003.

In the 2003 annual report, the company observed that its long-term rate of return on pension assets is based on an expectation that the investments will earn a 3% "alpha" or pure return over the benchmark return of 6.5%. "Over the period of 19 years during which this strategy has been in place, the U.S. fund has achieved a net compound annual return of 17.4%, or 6.4 percentage points in excess of the benchmark return of 11%," Weyerhaeuser noted in its 2003 annual report.

On average, the largest 158 of the companies expected to earn 7.98% on their pension assets in 2003, compared with the average 8.63% for all of the companies in the index with pension plans assumed in 2002, and their 9.15% average in 2001.

Mr. Silverblatt noted that the reduction in the assumed long-term rate of return on pension assets is the "biggest change since 1992."

The 2003 annual reports also show that companies assumed a discount rate, on average, of 6.09%, compared with 6.64% at the end of 2002, and 7.13% at the end of 2001. The discount rate is the interest rate companies use to calculate the present value of the future benefits they expect to pay.

In an earlier warning to companies, the SEC had said it expected them to assume discount rates comparable to the interest rate on high-grade corporate bonds.

The discount rate and actuarial return assumptions show "a great deal of herding," said Jeremy Gold, an independent pension actuary in New York.

"They have got the twin messages the SEC sent out, first in 1993, which put the discount rate in a narrow range just around 6% today, and then the 9% cap" last year, Mr. Gold noted.