Buffett: Pension Assumptions Out of This World

August 8, 2002 (PLANSPONSOR.com) - Billionaire investor Warren Buffett thinks corporate managements got swept up in the exuberant late 1990s bull market, leading them to forecast gains on pension plans that were too high.

But that’s going to change, said Buffett, often called the “Oracle of Omaha” for his stock-picking prowess and Nebraska offices.

Buffett has objected to companies booking overly lofty expected returns on pension plans only to slash numbers when stock markets failed to deliver.

“Managements, like the American public, have been adjusting their expectations,” Buffett told Reuters. “When people look at what is the situation in the investment world, they’ll realize that like everyone else in the world, they got a little carried away with the possibilities in the investment markets a few years ago in terms of setting assumptions.”

The way companies account for pensions is under discussion. Companies make assumptions about what kinds of returns their pension funds will make, reflecting an average long-term return. This lets companies smooth out pension fund returns over the long term, but Buffett thinks many of their assumptions are overly optimistic.

Current Assumptions Up to 11%

“I think there will be some changes in that,” Buffett said. In July, Buffett wrote in a letter published in the New York Times that companies in the Standard & Poor’s 500 index are assuming investment rate returns as high as 11%.

At top US company General Electric Co. for example, pension income contributed more than $1.48 billion to pre-tax earnings. But that contribution is expected to be more than halved this year on increased healthcare costs and lower expected returns, GE said in its 2001 annual report.

Standard & Poor’s in fact recalculated GE’s 2001 reported operating earnings of $1.42 a share last year to strip out 19 cents of pension gains, 4 cents for the cost of stock options grants and 6 cents for gains from asset sales.

Defense company Northrop Grumman Corp. already reports quarterly earnings two ways: before and after its pension fund income.