Clearing the air on pensions

Boeing committed to secure funds for retirees, workers

BY JOHN MORROCCO AND PHIL ANDERSON

The business media has been buzzing lately about corporate pension plans. You're probably hearing phrases like ''under-funded plans,'' ''charges to equity'' and statements about ''likely future financial impacts'' that involve some pretty substantial dollar amounts.

Indeed, when Boeing announced its third-quarter results in October, the company indicated it is likely to recognize a significant, non-cash, pension-related charge to equity in the fourth quarter.

What does all of this really mean and how does it affect Boeing employees' pensions? The short answer is that Boeing is committed to maintaining strong and secure pension funds for its retirees and employees.

Understanding how it all works is a bit complicated, but it's worth the journey.

Today, more than 550,000 active and former employees participate in The Boeing Company's pension plans. Each year the company distributes approximately $2 billion to retired employees and their beneficiaries. The money comes from Boeing's pension trust funds, which consist of some 30 individual defined benefit plans and represent one of the largest employer pension trusts in the United States. It's important to note that pensions are just one element of an employee's total retirement income that also includes Social Security, employer- matching 401(k) savings plans and personal savings.

Boeing's pension trust funds are protected in two ways. First, they are managed separately from all other Boeing operations and are subject to U.S. government regulations under the Employee Retirement Income Security Act of 1974. ERISA established laws for managing all corporate pension funds to help guarantee that the benefits will be available to people as they retire from the workforce. Second, corporate pension plans are backed by the Pension Benefit Guaranty Corporation, a government agency that insures employee benefits in the event there are insufficient funds in a trust plan to meet its obligations. All of Boeing's pension plans currently are fully funded under ERISA guidelines. So why the talk of pension fund charges? Because there are different measures of a pension plan's funded status— one for funding (or cash contribution) purposes under ERISA guidelines, and one for accounting purposes, which involves some fairly complicated calculations. The important point is that they involve different criteria and time frames.

Obligations and assets

A pension fund is composed of two elements: a company's obligation to provide benefits; and the money, or assets, used to pay those benefits. First, let's look at the obligation.

Pension obligations are based on the provisions of the individual plan and include such considerations as: When does an employee start receiving benefits? How much money will he or she receive and for how long? Companies estimate the total obligation of the fund based on these provisions and the number of employees eligible for benefits. Those fixed amounts that need to be paid out in the future are then converted into today's dollars to provide the so-called ''present value'' of the fund's total obligation.

The second element is the pension fund's assets—the money available to meet the plan's obligations. These assets are invested in the financial markets with the goal of obtaining sufficient returns to cover future growth of the obligation. Each year, the total benefit obligation is compared to the fair-market value of the plan assets. When plan assets exceed the amount of the total obligation, the pension fund is considered fully funded.

At the end of 2000, Boeing had plan assets of $42.9 billion and benefit obligations of $29.1 billion. At the end of 2001, the plan assets were $33.8 billion and benefit obligations grew to $32.7 billion. So in a year's time, benefit obligations rose while plan assets were significantly lower. Why?

There are two factors at work. One is the decline in the discount rate, which is used to determine the ''present value'' of future pension obligations. That means higher pension liabilities. At the same time, Boeing's pension plan assets are invested in the same financial markets that most of us invest in. And as we all know, those markets have been generating negative returns over the past few years. Until the financial markets improve, it is likely that the fair-market value of the fund assets will fall below the total benefit obligation.

So what happens then? In general, ERISA requires companies to make cash contributions to pension plans when assets fall below a 90 percent threshold for three years. Accounting rules governing pension funds, however, require companies to report annually in their financial statements on the market value of their fund assets compared with the plan obligations over the long term. When the market value falls below projected liabilities, there is a requirement to recognize the difference as an increased liability and a reduction to equity. And that's the reason Boeing is anticipating a ''non-cash'' charge to equity in the fourth quarter.

While the amount a plan might be ''underfunded'' under accounting definitions may sound large, remember that the gap is a measure of assets on hand versus forecast payments that stretch out for decades into the future. At the same time, the difference between pension plan assets and the present value of future payment obligations is a moving target, affected by financial market fluctuations and the mix of investments in the portfolio, as well as changing interest rates and benefit provisions.