More on that Pension Problem

I have been writing about the corporate pension problem – the “other” corporate accounting problem that could be as serious as the falsely reported earnings scandal. This is an important problem worth paying attention to. In a nutshell, when stocks were climbing corporations didn’t have to contribute to their pension funds, and could report higher profits. Now stocks are lower, the pension funds are underfunded, and the companies have to come up with cash and put it into the funds.

Today’s New York Times has a story about this. “The fine print in G.M.’s 2001 annual report shows that its retiree benefit plans, including pensions and health care, have unfinanced liabilities of a staggering $61 billion. That is up from $34 billion in 1999 and reflects how the market has affected companies that made big promises to their workers. Some of that shows up in liabilities on the balance sheet, but about $11.5 billion does not.”

“In the first half of this year, G.M.’s pension funds lost about 3 percent of their value. If the accounting rules required G.M. to report based on actual performance, rather than the 10 percent annual gains it optimistically assumes, I estimate that it would have posted a net loss of $2.3 billion rather than a $1.5 billion profit. Similarly, reported profits from 2000 and 2001 would have vanished.”

In other words, a $11.5 billion problem not showing up on the books, GM reports a profits of $1.5 billion, when actually it is a loss of $2.3 billion, and their profits from 2000 and 2001 were not really profits.