VideoBy many accounts, it has been a good year for corporate pension funds. For the first time since 1999, assets for most pension portfolios showed positive investment returns, reducing deficits by more than $50 billion. Meanwhile, discount-rate relief passed by Congress in April has lowered required contributions to many underfunded plans at least temporarily. But the question remains: is Corporate America's $4 trillion-plus pension portfolio any better prepared to weather the next downturn?
A revision of FAS 132 was supposed to answer that question. Thanks to the new regulations, which went into effect last December, companies have had to disclose descriptions of investment strategies and targets, plan-asset allocations, expected benefits payments going forward five years, and estimated cash contributions for the coming fiscal year.
The new disclosures are reassuring, but they are far from conclusive.
On the positive side, corporate pension plans appear adequately diversified. According to Howard Silverblatt, a market equities analyst for Standard & Poor's, the average S&P 500 company has 64.3 percent of its pension assets in equities, 30.1 percent in fixed income, 4.3 percent in real estate, and 1.8 percent in "other" investments.
Companies are also showing more restraint in projecting expected rates of return from pension portfolios — figures they were charged with inflating during the market meltdown. Jack Ciesielski, publisher of The Analyst's Accounting Observer, says that 2004 10-Ks show "a big outbreak of rationality" associated with those rates.
FAS 132 will also allow analysts to better question them. "Now when a company says it's expecting a 10 percent return, you can shoot your mouth off if the plan has 60 percent of its assets in fixed income," he says.
Others say that FAS 132 barely scratches the surface. The information required "is a lot of fluff," charges Mark Beilke, director of employee-benefits research at actuarial firm Milliman Inc. "The idea was to show how the payments and liabilities of a plan will unfold over the future — but it failed." The mandate does not elicit the right kind of information about the types of assets and length of liabilities over the life of a plan, he charges.
With investors and regulators looking closely at pension performance, many believe FAS 132 is just the beginning of a push for more disclosure. Once the door is open and investors realize the impact of pension performance on corporate performance, "they start to ask for more," says Erol Hakanoglu, managing director at Goldman Sachs's Capital Market Strategies. He predicts disclosure trends for pensions will mirror those for stock options, with firms gradually providing more details on assets and the durations of liabilities.
What's Missing
One of the biggest complaints against FAS 132 is that the requirements are not specific enough. For example, the four categories in which assets must be grouped — equities, fixed income, real estate, and other — are too vague for analysts to adequately compare expected rates of return against market rates. "If you say you invest in real estate, is that a REIT [real estate investment trust], or a property, or what? And there is no separate disclosure for hedge funds or high-yield bonds, which will be more volatile," says Hakanoglu. Moreover, there's little guarantee that what is reported at year-end will hold true during the year.
Neither does FAS 132 clarify the discount-rate assumptions used to calculate pension liabilities — which companies have long been required to disclose but not explain. The "right" discount rate would be one that reflects zero-coupon bonds coming due at the same time as pension payouts. But most firms simply extrapolate that number based on the corporate AA bond rate. "It's not clear that they're picking a rate that is really tied to the characteristics of their plan," says Mike Johnston, leader of Hewitt Associates's retirement and financial-management practice. The resulting pension income or expense is a noncash item, but it affects net income. DuPont, for example, would face an additional $60 million in pension expenses if it were to lower its discount rate by half a percentage point, according to its recent 10-K.
What's missing, says Johnston, is a requirement to reveal the duration of the liabilities, or how quickly the company must make good on its obligations. The mandate to show projected benefit payouts for each of the next 5 years and a total estimate for the next 10 years "doesn't define what the composition of the liabilities are or what the cash call on the company might be," he adds.
Analysts are also skeptical about the projected cash contributions that companies now disclose, perhaps the most sensitive number required under FAS 132. According to a study of the S&P 500, the aggregate planned 2004 contribution was pegged at $20 billion, down from the aggregate $71 billion contributed in 2003. "If corporate bond rates don't go up significantly, that $20 billion could go up a lot — and that's a cash-flow number," says Silverblatt. He expects to track those estimates, since FAS 132 also requires firms to update the estimates quarterly if there is a "significant" change.
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