Mind Games
Bloomberg Personal Finance (11/02) p.29; Carlson, Chuck

General Electric, which uses stated earnings on their pension funds to boost profits, saw the actual value of its pension plan's assets decline, while the money generated by the fund reached almost $1.5 billion in pre-tax income during 2001 alone. While workers take on the majority of risk in defined-contribution plans, like 401(k)s, the employers bear the risk of meeting payouts in pension plans, or defined-benefit plans, which must be cited in companies' financial statements. Companies typically overstate their projections for pension plan earnings, since money from over-funded plans can be recognized as profits on company financial statements. Since companies determine the expected long-term rate of return on plan assets, the rate of compensation increases, and the discount rate, the companies easily determine whether the plans will be under-funded or over-funded. When GE's pension plan created about $1.5 billion in profits in 2001, it assumed that the plan's assets would increase by 9.5 percent during the year, when the plan's assets actually declined by 6 percent. Statistics show that the 50 largest U.S. corporate pension funds lost about $36 billion in value during the last year, despite the fact that they had projected gains of $55 billion in plan assets. The weak stock market forced companies to lower the expected rates of return for their pension plans--a move that could have serious implications on the stock market and on investor's perceptions of corporate management. Experts say that famed investor Warren Buffett's standard 6.5 percent assumed annual rate of return for Berkshire Hathaway's pension assets is realistic, and that companies with assumed returns over 10 percent cannot be trusted.

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