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Mix-Ansicht- GE:$806Mio Gewinn nach GAAP aus. Pensionsfds - laut Fußnote $5,2 Mrd Verlust - kingsolomon, 10.03.2003, 12:55
GE:$806Mio Gewinn nach GAAP aus. Pensionsfds - laut Fußnote $5,2 Mrd Verlust
-->03/10 00:07
GE Annual Report Footnote Discloses $5.25 Billion Pension Loss
By David Evans
Fairfield, Connecticut, March 10 (Bloomberg) -- General Electric Co. said Friday in its annual report that its post- retirement benefit plans contributed $806 million pretax to earnings in 2002. Investors had to read a footnote 37 pages later to learn that GE's pension plan actually lost $5.25 billion, equal to 29 percent of the company's pretax earnings.
The world's second largest company by market value, after Microsoft Corp., followed accounting rules in reporting positive pension earnings. It used an expected rate of return -- an estimated gain of 8.5 percent -- on its income statement, rather than the actual return, which was a loss of 11.67 percent.
The pension investment loss for 2002 isn't disclosed in GE's 26-page management discussion and analysis (MD&A) section. It appeared in a financial footnote that's not part of the MD&A. Officials of the U.S. Securities and Exchange Commission said last month that companies should go beyond accounting rules to clearly disclose and explain pension results to investors.
''GE is complying with the letter of the accounting rules, but not with the spirit of MD&A disclosure,'' said Frank Partnoy, a professor at the University of San Diego Law School. ''GE's finances are extraordinarily complicated.''
U.S. accounting rules, written in 1985 by the Financial Accounting Standards Board, say companies should include estimated gains, rather than actual gains or losses, from pension fund investments in order to ''smooth'' stock market volatility from year-to-year.
Stock Market Losses
If actual pension liabilities had been counted in financial statements, aggregate earnings for the S&P 500 would have been 69 percent lower than the companies reported for 2001, or $68.7 billion rather than $219 billion, Credit Suisse First Boston Corp. found in a research study on pension accounting published in September.
Stock market declines in the past two years have led to more than $200 billion in pension fund losses for S&P 500 companies, according to the CSFB study.
SEC officials, after reviewing more than 500 annual reports filed last year, said companies didn't provide sufficient information to investors about their pension losses, and asked companies to start doing so, beginning this year.
''Pension disclosures must reflect financial reality and be as transparent as possible,'' SEC Commissioner Harvey Goldschmid told Bloomberg News last month.
Alan Beller, director of the SEC's division of corporation finance, said in an interview last month that actual pension returns should be included when companies discuss pension accounting and pension fund performance.
More Disclosure Needed
''The actual rate of return is something that should be an element of that disclosure,'' Beller said.
GE spokesman David Frail said his company's pension disclosures are complete. ''We disclose the actual annual loss in the appropriate place, namely the notes,'' he said. ''GE has been among the more conservative companies when it comes to pension plan assumptions, and is among the most detailed in its disclosures about pension plan performance and assumptions.''
Jeffrey Immelt, GE's chief executive, wrote in this year's letter to shareholders that the company's disclosure practices are getting better.
''We have significantly increased the quantity and quality of our financial disclosures and investor interfaces,'' Immelt wrote.
GE's pension disclosure has expanded. For example, the company's annual report described the allocation of its pension assets, information not found in the 2001 report.
Investment Breakdown
GE said 56 percent of its fund was invested in stocks on Dec. 31. In addition, 26 percent was invested in fixed-income securities, 6 percent in real estate and 12 percent in other investments, the report said.
The company's stock made up 6 percent of the pension plan's $37.9 billion of assets at year-end, the footnote disclosed. GE shares fell 39 percent in 2002.
GE's management discussion explains the company reduced its expected rate of return to 8.5 percent from 9.5 percent last year, increasing pension costs by $480 million.
''Of course, actual annual investment returns can be extremely volatile,'' the report said. ''This short-term market volatility occurs in context of the long-term nature of pension plans. U.S. accounting principles provide that differences between assumed and actual returns are recognized over the average future service of employees.''
Surplus Declined
The management's discussion doesn't say that the plans' surplus declined 82 percent since Jan. 1, 2000, to $4.5 billion on Dec. 31, 2002 from $24.7 billion. In 2001, the surplus was $14.5 billion, according to the footnotes.
GE hasn't made contributions to its pension plan since 1987, according to the management discussion and analysis. GE said no such contributions would be needed, as long as expected rates of return are achieved.
''To the best of our ability to forecast the next five years, we do not anticipate making contributions to that plan so long as expected investment returns are achieved.''
GE's pension plan had 508,000 participants at year-end, including 136,000 current employees. The company has 179,000 employees who don't participate in the pension plan.
Rate Too High
Ethan Kra, chief actuary of the U.S. retirement practice at Marsh & McLennan Cos.' Mercer Human Resources Consulting, the world's largest actuarial firm, said last month that most U.S. companies have been told by their actuaries that pension funds probably won't earn 8.5 percent to 9 percent in the future.
Kra said his firm estimates the most likely return in the long run would be 6.5 to 7.5 percent. Billionaire investor Warrant Buffett has been suggesting since December 2001 that companies should use an estimated return rate of 6.5 percent, the number used by his Berkshire Hathaway Inc.
Buffett's pension recommendation has not been followed by most of the Standard & Poor's 500 Index companies, according to their filings.
GE's estimated return rate of 8.5 percent is among the lowest used by U.S. companies, said spokesman Frail. The average estimated return rate in 2002 was 9 percent, according to Kevin Wagner, retirement practice director for Watson Wyatt Worldwide, a pension-consulting firm.
Tomorrow morning at 10 a.m., the U.S. Senate Finance Committee will hold a hearing in Washington called, ''The Funding Challenge, Keeping Defined Benefit Pension Plans Afloat.''
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