Heightened Pensions
Worth (08/02) Vol. 18, No. 8 p.47; Rogers, Jim

Companies are allowed to assume an expected rate of return for their defined benefit pension plans, but this strategy could be more misleading to investors and dangerous for businesses than they may believe. A recent study shows that the average assumed rate of return for 50 of the largest U.S. corporations offering defined benefit pension plans was 9.38 percent, or $54.4 billion of profits from pension funds, while in actuality the pension funds lost over $90 billion. Companies often use this method of calculation, called "smoothing," as a way to balance out the good and bad years. The difference in assumed rates and actual rates, however, is upsetting shareholders and frightening those who do, or will, live off the pension funds. Experts say that unless companies change their strategies, pension funds will become even more underfunded, and companies may have to take a huge cut in profits and earnings to replace the funds.


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