DB Plans Likely To Hit Corporate Bottom Line

February 26, 2001 (PLANSPONSOR.com) - Most companies with defined benefit pension plans will suffer some kind of hit to their bottom line, courtesy of the turbulent markets, according to Watson Wyatt.

A recent article noted that while pension funds generally don’t hold all their investments in stock funds, most calendar-year pension funds are likely to experience negative or small gains in 2000.  Under current accounting rules, those lower returns will generally mean higher pension expense, or lower pension income this year.

Thumb “Nails”

Watson Wyatt has applied a few general rules of thumb to estimate how lower pension returns might impact your bottom line. 

If the pension fund’s rate of return for 2000 was:

  • 5%, you can take the assets times 0.5% to assess the impact
  • 0%, take the assets times 1%
  • minus 5%, take the assets times 1.5%
  • minus 10%, take the assets times 2.0% to estimate the damage.

As an example, if the return on plan assets in 2000 was minus 5% for a $500 million plan, this year’s pension expense would be estimated at $7.5 million ($500 million X 1.5%) higher than 2000, all else being equal.

An important factor in assessing the impact is the proportion of pension assets compared with net operating income (NOI).

The assumptions used include:

  • the plan uses market value of assets to determine pension expense, rather than market-related.
  • if the plan had earned its assumed rate of return during 2000, plan expense (income) would be expected to remain about the same from 2000 to 2001
  • the same assumptions used to determine 2000 expense were also used for 2001 expense
  • the investment return assumption is 9.5%
  • there is no amortization of gains and losses in 2000 or 2001

Different assumptions could provide a different result projection.

The Watson Wyatt article is at http://www.watsonwyatt.com/homepage/us/new/Insider/new/2001/2001_02_02.asp