RETIREE PENSIONS FROM SOLUTIA – 4/17/03
- 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.