RETIREE PENSIONS FROM SOLUTIA – 4/17/03
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By Steve Hinds
The following information was obtained from Solutia’s 2002
Annual Report and 10-K Statement.
Sales from
Continuing Operations were $2,241M in 2002 or 1% below the prior year’s figure. Net income from Continuing Operations totaled
$(8)M versus $(81)M in the prior year. Additionally,
changes in accounting principles for restructuring and other items generated a
loss of $167M bringing the total 2002 net income to $(175)M.
Information on the
status of Solutia’s Pension Fund (Worldwide basis) is noted on page 55
of the 10-K Statement and is shown in the required FASB (Financial Accounting
Standards Board) format. It shows the Pension
Benefit Obligations to be $1,626M versus Plan Assets of $1,039M -- which, in
the language normally used in pension information discussions, represents underfunding
of $587M or 36%.
However, it is
very important for retirees to understand that the Obligation and Asset figures
are an apples and oranges comparison. The
Pension Obligation figure is the 12/31/02 Present Value of all future obligations
using a discount rate of 6.75%. On the
other hand, the Pension Asset figure is nothing more than a snapshot of the year-end
12/31/02 status -- without consideration of the future earnings of those
assets. That information is, therefore,
of limited value -- but it’s all any stockholder or outside agency receives.
The report also
mentions that:
·
The Discount Rate, which is used to determine
the Present Value of the Pension Obligation, was reduced from 7.00% in 2001 to
6.75% in 2002. (For your background
information the higher the discount rate, the lower the expected Pension
Obligation); and
·
The Assumed Long-Term Rate of Return on Pension
Assets was reduced from 9.50% in 2001 to 9.25% in 2002. (The higher the rate of return, the higher
the expected value of the Pension Assets.) It’s unclear how this figure is used other than for general
information, since it was not used in the 12/31/02 Asset figures previously
discussed.
The report also notes on page 31 that according to IRS
funding rules, Solutia does not expect to be required to make a pension
contribution in 2003. As shown on page
28 of the 10-K, additional funding of the Pension Plan will be required in 2005
($178M), 2006-2007 ($306M) and thereafter ($103M).
The St. Louis Post-Dispatch featured an interesting article in its 4/9/03 issue entitled, “Pension Plans are Mauled by Bear Market.” It indicated that 63% of all pension plans were underfunded in 2002 compared to only 16% in 1998. The article also discussed the Assumed Rate of Return figures used by several major St. Louis corporations and commented that Warren Buffett’s projected return of 6.5% seemed more reasonable.
Solutia will file its 2002 tax return sometime in the June -
September, 2003 period. That document
includes the Form 5500 Schedule B data (U.S. Only basis) using IRS and PBGC
reporting guidelines. That report generally
will show a smaller percentage underfunding than that derived for the worldwide
figures. This website will update the
Pension Obligation/Asset comparison when that information is available.
Beyond this discussion of pension matters, we note that the
PCB litigation situation continues to be a major issue depressing Solutia’s
stock price ($1.33/share on 4/16/03). Only
time will tell how that situation is resolved.