RETIREE PENSIONS FROM THE NEW MONSANTO – 4/17/03
UPDATE
-
By Steve Hinds
(NOTE: Dated updates to the original article may
be found at the end of this document.)
Pharmacia completed the spin-off of the remaining 85% of the
new Monsanto (MON) on August 13, 2002.
As a result of that action, all Monsanto retiree monthly pension checks
now come from Monsanto rather than Pharmacia.
In view of that change and Monsanto’s large income loss of $1.75 billion
through the first three quarters of 2002, many retirees have expressed concern
about the future security of their pension payments. This article attempts to give some insight into that situation
and includes inputs provided by Louis Kruger, George Griffin and Rod Bishop.
According to Schedule B of Form 5500 of its 2001 tax return
as obtained from the Monsanto Benefits Center (Fidelity at 800/338-3308),
Monsanto’s pension assets for year-end 2000 were $1,593 million while
its liabilities were $1,733 million.
This represents underfunding of $140 million or 8%. Unfortunately those figures are for the old
Monsanto including Searle Pharmaceuticals, etc. and are, therefore, not useful
for current appraisals.
The year-end 2001 figures for the new Monsanto
may be found in Monsanto’s 10Q Statement for the Third Quarter of 2002, page
18, in the next to the last paragraph.
It reports assets of $1.0 billion with liabilities of $1.3 billion --
which represents underfunding of $0.3 billion or 23%. The last paragraph of page 36 goes on to say that those figures
include a voluntary Monsanto contribution of $10 million to the Pension Trust’s
assets in the third quarter and anticipation that similar contributions will be
made in the fourth quarter of 2002, as well as in each quarter of 2003.
Figures for year-end 2002 will be available no later than
October 15, 2003 when Monsanto is required to file its 2002 tax return, and
this website will provide a revised summary for retirees at that time. In all likelihood, the severe bear market of
2002 will probably create a further gap between assets and liabilities in that
report. Additionally, as with other major
corporations, Monsanto will probably reduce the long-term return it
expects on pension investments from its current 9.5% level. A recent financial article suggested that
companies in the S&P500 are likely to cut their expected long-term
rate of return on pension investments from 9.3% in 2002 to an average of 8% in
2003.
With respect to Monsanto’s third quarter year-to-date net
income loss of $1,754 million, it’s important to note that the major items
creating the loss were:
Without those charges, Monsanto’s nine-month net income
would have been approximately $207 million versus $399 million for 2001.
With regard to retirees building a future knowledge base on
this pension subject, let me make the following suggestions:
·
Routinely obtain copies of Monsanto’s Quarterly 10Q Reports,
Annual Report, 10K, Annual Proxy Statement and Form 5500. Review those documents for major changes in
the profitability of Monsanto and the adequacy of the pension fund;
·
Obtain copies of Monsanto’s 1/2/02 Pension Plan (28
pages) from the Monsanto Benefits Center (Fidelity at 800/338-3308). Read it all, particularly page 18 which
covers eligibility requirements for retirees employed prior to 1997 and page 24
covering a Reservation of Rights clause to amend or terminate the plan at
Monsanto’s discretion (although it goes on to say that Monsanto has no current
intention of terminating the plan);
·
Call the Pension Benefit Guaranty Corporation
(800/400-7242) and request copies of their brochure entitled, “Your Guaranteed
Pension.” It discusses the insurance
program that provides some back-up for Qualified Pensions of companies in
financial difficulty. You can also
obtain this same information from their web site at “www. PBGC.gov”.
In reviewing the PBGC information,
you will find that the two keys to determination of the maximum Single Life
Annuity Qualified Pension the PBGC can provide are: 1) The year of the plan's
termination when the PBGC takes over; and 2) The retiree's age at that
moment. Let's take the following
example. An individual retires in 1992
at age 55 with a yearly total Single Life Annuity Pension (Qualified &
Non-Qualified) of $70,000. In 2002,
when he is age 65, the PBGC takes over responsibility for his company's pension
fund. What is the maximum income that
retiree can expect to receive?
The answer is that the maximum
Single Life Annuity Qualified Pension this 65 year-old retiree (or any retiree
beyond age 65) could receive from the PBGC in 2002 is $42,954/year -- per the
PBGC limits shown in a table at the end of their “Guaranteed Pensions”
article. If the retiree was age 60 when
the plan was terminated in 2002, the maximum that he could receive is
$27,921/year. And, for a retiree who
was age 55 in 2002, it would be $19,330/year.
Keep in mind that these figures would be less if paid in other forms,
such as a Joint Survivor Annuity.
·
Go to your library and make a copy of an article from
the October 2002 issue of Consumer Reports entitled, “Keep Tabs on your
Pension”, pages 11-13. It’s a superb
review of several actual corporate situations and includes a detailed
discussion of the Form 5500 and the PBGC operations. You absolutely must have this article! If you can’t find it in your library, then
call Consumer Reports and request a reprint; and finally
·
Be aware that if another company acquired Monsanto in
the future, one of two things could happen.
If it were a Stock-for-Stock (or Cash-for-Stock) transaction, the
acquirer would then pick up all of Monsanto’s assets -- and liabilities
-- with the latter including pensions, health care costs, environmental costs,
etc. If, on the other hand, it were a
Purchase-of-Assets (or Cash-for-Assets) transaction, then the acquirer has the
right to accept or reject responsibility for specific liabilities or for any
and all liabilities.
The latter case could have some
implications for retirees if the acquirer did not accept the pension and health
care liabilities. That situation would
mean:
1)
The proceeds from the sale would first be used to
satisfy any secured debt obligations and then, per PBGC rules, the
Qualified Pension obligation -- before being used to satisfy other liabilities;
and
2)
Retirees and vested individuals would lose the
Non-Qualified portion of their pension because it is not guaranteed by the PBGC
-- and also their company sponsored health care coverage. And, even the retiree’s Single Life Annuity
Qualified Pension would be subject to the maximum PBGC limitations previously
described.
In conclusion, we hope that this article has been useful to
retirees and that it has emphasized the major elements everyone should be
monitoring.
As we were going to press with this retiree website article,
several interesting things happened.
First, the January 10, 2003 issue of the St. Louis Post-Dispatch
featured a very timely story on U.S. Steel’s purchase of National Steel here in
St. Louis. It describes what can happen
in a Purchase of Assets situation.
George Griffin called later in the morning and reminded me that an
earlier National Steel story appeared in the press on December 6, 2002
describing what happens when the PBGC takes over pension obligations. After talking with our website wizard, Don
Harris, he then arranged for you to directly access these reports by clicking
on the following links:
· January 10
PD Article - U.S. Steel sets sights on Granite City plant
· December 6, 2002 –
PBGC ANNOUNCES IT WILL TAKE OVER NATIONAL STEEL PENSION OBLIGATIONS
Secondly, Don found that you can access the Consumer Reports October 2002 pension article by clicking on this link:
· Consumer Reports October, 2002 - Keep tabs on your pension
Thirdly, George Griffin suggests you may want to pick up a
copy of the latest Value Line reports on Monsanto and Solutia from your local
library.
And lastly, the Post-Dispatch also had a short story today
(January 10, 2003) on GM’s pension situation.
Although it’s no consolation to Monsanto or Solutia retirees, GM reports
that its U.S. pension plan was underfunded by $19.3 billion at the end of 2002,
versus being only $9.1 billion short at
the end of 2001. GM expects to increase
their contributions to the pension fund from $1 billion in 2002 to $3 billion
in 2003.
1/24/03 Addition: Here's one more bit
of information that you will find interesting. It's an article from Money
magazine's January 2003 issue entitled, "The
Next Scare." It deals with the pension funding status of ten
major U.S. corporations and the concern about the potential impact of the 2002
bear market, etc. The archived article, unfortunately, doesn't include a
key table from the original publication, so I've copied it below for your
use. All data is as of 12/31/2001.
% of Full Funding
Shortfall ($M)
Phillips Petroleum
60.2%
-$2,585
ExxonMobil
65.9%
-$11,011
Delphi Automotive
72.0%
-$10,811
Conoco
72.1%
-$1,260
Pharmacia
73.9%
-$2,320
United Airlines
75.0%
-$12,615
Freddie Mac
77.7%
-$219
Coca-Cola
78.3%
-$2,320
Merck
79.3%
-$4,359
United Technologies
81.1%
-$14,683
1/31/03 Addition: The Pension Benefit
Guaranty Corporation reported today (Reuters)
that its $7.7 billion surplus in 2001 declined to a $3.64 billion deficit at
the end of fiscal 2002 (9/30/02). Most of this loss was attributable to
pension plans in the steel industry (LTV, National and Bethlehem). In
2002, the PBGC became trustee of 144 pension plans covering 187,000 people, up
from 104 plans and 89,000 participants the year before. The total number
of participants owed or receiving guaranteed benefits from the PBGC rose to
783,000 from 624,000.
4/17/03 UPDATE: The following information
was obtained from Monsanto’s 2002 Annual Report and 10-K Statement.
Sales for the year were $4,673M or 14% below the prior
year’s figure. Net income totaled
$(1,693)M and included a $(1,822)M aftertax charge for changes in accounting
principles. Approximately $(1.8)B of
that charge was due to goodwill impairment associated with the corn and wheat
seed businesses acquired in 1997-1998.
Without the special charges, 2002 net income would have been $129M
versus $295M in 2001.
Information on the status of Monsanto’s Pension Fund
(Worldwide basis) is noted on page 58 of the Annual Report and is shown in the
required FASB (Financial Accounting Standards Board) format. It shows the Pension Benefit Obligations to
be $1,566M versus 12/31/02 Plan Assets of $894M -- which, in the language
normally used in pension information discussions, represents underfunding of
$672M or 43%.
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 7.25% 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 2000 and 2001 to 8.75% 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 34 that Monsanto made
voluntary cash contributions totaling $20M to the U.S. Pension Plan in 2002 and
anticipates additional voluntary funding of approximately $60M in 2003.
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.
Monsanto 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
will generally 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.