20-3 Pension accounting 2

20-3 Pension accounting 2 - Investors voice concerns on...

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Investors voice concerns on pension assumptions Source: Financial Times, 15 January 2002 After one of the worst years for corporate profitabil- ity in a decade, one of professional investors’ biggest worries this year is not more gloomy news from companies, but over-optimistic assumptions for a little-noted income statement item: their pension funds. Leading investors say many US companies are still living in the late 1990s when it comes to setting the assumptions for returns on their pension funds. Many are still expecting investment returns of 9.5-10 per cent - expectations which serve to boost earnings estimates - when profits are likely to be far lower. Investors such as Warren Buffett, who called such expectations “heroic” in an article in Fortune maga- zine, warn that the difference between expectation and reality will drag down earnings. The adjustments investors have to make to pull com- pany adjustments in line with reality are substantial. Chris Davis, a mutual fund manager, reckons that if you start with a return of 5-6 per cent for a portfolio of bonds, then assume returns 8-9 per cent for stocks, their long-term average return, you will end up with a blended average around 7-8 per cent. Other value investors, such as mutual fund star Bill Miller, who has beaten the benchmark S&P 500 for the past 11 years, say the task of making those ad- justments is a top priority this year. Mr. Miller, who runs the $11bn Legg Mason Value Trust, has put one analyst on his team to work purely on such corporate reporting issues. It is striking that corporate pension funds, which do not find their way to investors’ pockets, can have such a substantial effect on corporate operating prof- its. According to Goldman Sachs, 35 companies in the S&P 500 derived more than 10 per cent of their earnings from the performance of their pension funds. For many large old companies, with large pen- sion liabilities, it is even more than that. Of the S&P 100, 24 out of 81 companies with pen-
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This note was uploaded on 05/03/2010 for the course ACCT 202 taught by Professor Yang during the Spring '10 term at UPenn.

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20-3 Pension accounting 2 - Investors voice concerns on...

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