In the section of his 2007 letter to the shareholders of Berkshire Hathaway titled “Fanciful Figures—How Public Companies Juice Earnings,” Warren Buffett referred to the investment return assumption (the anticipated return on a defined-benefit pension plan’s current and future assets):

“Decades of option-accounting nonsense have now been put to rest, but other accounting choices remain—important among these [is] the investment-return assumption a company uses in calculating pension expense. It will come as no surprise that many companies continue to choose an assumption that allows them to report less-than-solid ‘earnings.’ For the 363 companies in the S&P that have pension plans, this assumption in 2006 averaged 8%.”

In his explanation, Buffett assumes a 5 percent return on cash and bonds, which averaged 28 percent of US pension fund assets. Therefore, this implies that the remaining 72 percent of pension fund assets—predominately invested in equities—must earn a return of 9.2 percent, after all fees, to achieve the 8 percent overall return on the pension fund assets. To illustrate one perspective on an average pension fund achieving that 9.2 percent return, he estimates that the Dow Jones Industrial Index would need to close at about 2,000,000 on 31 December 2099 (compared to a level under 13,000 at the time of his writing) for this century’s returns on that US stock index to match just the 5.3 percent average annual compound return achieved in the 20th century.

i. How do aggressively optimistic estimates for returns on pension assets affect pension expense?

ii. Where can information about a company’s assumed returns on its pension assets be found?