;NEW YORK -- The 50 largest U.S. corporate pension funds lost 25 percent of their funding "cushions" in 2000, thanks to a collective $38.2 billion decline in assets, according to a recent survey by Milliman USA, an actuarial consulting firm.
   Nonetheless, these same 50 funds were able to report total profits of $8.7 billion through accounting techniques designed to "smooth" returns over a multiyear period, Milliman found.
   If the companies had reported actual returns from 2000, they would have had to acknowledge expenses of $27 billion, the report said.
   In addition, "the year 2001 is shaping up to be worse, with lots of sub-par earnings similar to the year 2000," said Adrien La Bombarde, a Milliman consultant who co-authored the report.
   Though there is no one definition, a pension plan is generally considered to be fully funded when it has enough assets to cover its liabilities if it were to be unexpectedly terminated. A pension's liabilities refers to the amount it must pay out to all the employees and retirees in its system throughout their retirement years.
   The 50 largest U.S. corporate pension funds -- which include those of Exxon Mobil Corp., General Motors Corp., and Ford Motor Co. -- had an average funded ratio of 125 percent at the close of 2000, down from an average 135 percent at the close of 1999, the survey found.
   Milliman warned, however, that if investment returns continue to decline, many pension plans will become underfunded, resulting in losses on the companies' balance sheets.
   "For an employer that had previously accumulated net pension assets ... the emergence of a minimum pension liability can have a whiplash effect on shareholder equity that can far surpass the one-year loss in funded status," Milliman said.
   The report attributed the pension funds' loss in assets to three factors: weak investment returns ($13.2 billion, as compared to expected returns of $49.3 billion); lower interest rates (increasing plans' obligations 2 percent to 5 percent); and the aging of the workforce (leading to higher benefit payments).
   Recognizing that pension funds invest for the very long term -- 30 years or more -- accountants regularly use smoothing techniques to spread out a fund's losses and gains, usually over a five-year period.
   "These aren't some spooky rules -- they're standard accounting methods," La Bombarde said.
   Nonetheless, since the techniques were only introduced in 1987, through Financial Accounting Standard 87, they have never been seriously tested by a down market and so may seem misleading, he said.
   "I think these returns will raise some serious questions regarding smoothing, especially after this year's (2001) results come out," he said.
   In 2001, despite another large expected decline in pension assets, many funds will still be able to report profits through smoothing, he explained.
   Analysts and other industry experts are well aware of the use of smoothing but do not always take it as much into account as they should, he said.
   However, the most obvious alternative to smoothing -- using actual pension returns on an annual basis - would lead to even greater problems, he said.
   "Since pension-plan assets are taken directly into a company's balance sheets, as if the pension was a basic operation, imagine what would have happened in '97, '98, '99 -- companies would have been reporting gigantic gains, even much larger than they did. A pension plan's long-term connection has to be recognized," he said.
   Rather than using actual pension returns on an annual basis or scrapping smoothing techniques altogether, one solution might be to report losses as pension liabilities, which would show up on company balance sheets, he said. FAS 87 has the model for such an alternative approach in its rules for underfunded pension plans, he said.

Detroit News

-- Anonymous, December 10, 2001