Pension plan sponsors are living in the past. Some critics say that many companies have not updated their investment-return and interest-rate assumptions to reflect the current conditions of low interest rates and dismal stock-market performance. And while plenty of plans are now underfunded, the true picture could show underfundings at crisis levels.

“Plan sponsors have become increasingly aggressive. They’re pushing the envelope on this stuff,” says Stephen Church, president of Piscataqua Research Inc., a Portsmouth, N.H., consultancy. “Interest-rate assumptions are too high, as are investment-return assumptions.”

Church says that plan sponsors are overstating interest rates — used to calculate a discounted present value of future liabilities — anywhere from 1 to 2 percent. The miscalculation has the effect of drastically underestimating what companies will owe future retirees in benefits.

Jeffrey Speicher, a spokesperson for Pension Benefit Guaranty Corp., which insures pension plans, says that pension assets have deteriorated. “Conditions are certainly very drastic right now,” he says.

Indeed they are. A recent survey by benefits consultant Watson Wyatt Worldwide found that of 500 pension plans studied, the percent with enough assets to cover total pension liabilities had dropped from 83 percent in 2000 to about 33 percent this year.

That means that companies are on the hook to make up the difference. Even though General Motors, for example, announced this summer that it contributed $2.2 billion to its pension fund, the plan is still underfunded by $20 billion, according to an estimate by UBS Warburg. Church, however, says that using more-conservative assumptions, the actual amount could be even higher.

GM’s plan assumes that investments will return roughly 10 percent annually. In 2001, however, the return on plan assets was a loss of more than 5.6 percent, and losses are expected to be higher this year. “Bad information leads to bad decisions,” says Church. “Companies need to do more to make sure things are presented in fair fashion.”

The Big Three’s Big Ifs

Automakers’ 2001 pension assumptions could hide shortfalls.

Source: Futuremetrics Inc.