Volume 13, Nos. 9 & 10


Sharp Stick Of The S&P 500: Pensions in 2003  Defined benefit pension plans are amorphous constructs that introduce all kinds of vagueness into performance reporting. Hard to get one's arms around them, full of accounting jargon, and related to promises often made without consideration of the consequences, they've generated fear and loathing among investors just because of the uncertainties they inject into the income statement - and because of the uncertainties they raise about future cash flows. Full of abstract and fuzzy concepts, over the last few years they've provided investors with the proverbial poke in the eye with a sharp stick. An intangible sharp stick, but investors felt it nonetheless. In 2003, a strengthening stock market plus employer commitments to increase contributions to underfunded plans placated many investors' fears. As they watched the stock market climb, investors worried less about the funded status of pension plans and ill effects of increasing contributions. At the same time, interest rates were still trending lower, powering more growth in projected benefit obligations. By year end, maybe investors shouldn't have been so sanguine: as a group, the underfunded pension situation had barely improved from 2002. Investors also felt more comfortable that firms were using more realistic asset earnings assumptions - but the basic flaws in the reporting of pension cost remained unchanged. In short, while there was plenty of improvement in the pension situation - particularly visible due to the new disclosures required by Statement 132(Revised) - there's still room for much more improvement in both the management of defined benefit pension plans and the reporting of their effects on corporate sponsors. This report takes a look at corporate pension funds as they really are at the end of 2003 for the S&P 500 and also how they affected reported earnings.

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