Swollen Pension Funds, Surprise Profits; Many Big Firms Reap Benefits as Bull Market Inflates Value of Retirement Plans
Corporate profits have been getting a boost recently from a surprising source -- the surging stock market's effect on the value of corporate pension funds. These pension plans, once a drag on earnings, are boosting the financial performance of many of the country's best-known companies.</br></br>The pension-fund bubble stems from the arcane accounting rules that govern the more than $1 trillion in private pensions. Under those rules, companies make assumptions about how much they will earn on their pension assets, how much they will have to pay out to future retirees and the future level of interest rates.</br></br>But what has been happening during the long bull market is that those assumptions have proved too conservative -- and the funds have swollen far beyond expectations as stock market returns have outpaced historical trends.</br></br>The excess, filtered through many layers of accounting, is dribbling down to the bottom line. And that's giving an extra boost to corporate profits at a time when earnings are being squeezed from lack of pricing power and rising wage pressures. Some companies are siphoning off some of the pension surplus to pay for other corporate needs, such as early-retirement plans, retiree health benefits and even merger financing.</br></br>For many businesses, the gain is twofold: Their plans are so flush they are being spared from having to make new annual contributions, and they are earning income from the excess that has built up throughout the stock market's rise.