could crimp pensions
Accounting change likely to stir controversy
By Adam Geller, Associated Press
The Arizona Republic
Tuesday, January 17, 2006
NEW YORK - It may sound arcane, but a planned overhaul of
the way companies keep their books on pensions and retiree
health care plans could come at a very real cost to workers
counting on those benefits.
The changes, likely to begin by year's end, come as a
growing number of companies freeze pensions and cut retiree
health benefits, shifting risks and costs to workers. In
recent weeks, IBM Corp. and Verizon Communications Inc. have
joined the list of those announcing they will freeze their
But some experts say new regulations requiring companies to
more accurately calculate and show the cost of their
retirement promises could speed up the move by employers
away from guaranteed pensions and other benefits.
"Changing accounting rules can cause companies to change
their behavior," said David Zion, an accounting analyst with
Credit Suisse First Boston.
Rules now in place give companies cover. Many have made
expensive retirement promises without putting aside all the
money needed to meet them. But they don't have to fully
disclose the shortfalls in their earnings statements or on
their balance sheets.
Instead, companies can post very positive numbers based on
assumptions about investment returns, when the actual
returns would hurt their results. And while companies are
required to disclose pension figures in footnotes to
financial statements, even those can be difficult to
"If you change those rules, you take that protection away,
and our thinking is a company may have to go out and protect
themselves," Zion said.
The question is how quickly that will happen and how
transparent it will be given the rapid cutbacks in benefits
already under way.
By law, companies can cut retiree health benefits at any
time, as long as the changes don't discriminate. They can't
yank pensions, but can freeze pension plans. Such moves
leave workers eligible for benefits already earned but halt
gains they would have been entitled to in later years on the
job. Other companies have closed pension plans to newly
Many companies freezing pensions say they are bolstering
401(k) plans, making set contributions while leaving workers
to manage for their own retirement. Small companies started
the trend, but in the past year some large employers
followed suit in freezing pensions for at least some of
their workers, including Sears Holding Corp. and
Pensions and other retirement benefits have stirred
controversy in accounting circles for years. Critics say
while companies made expensive promises to workers,
accounting rules let them engage in a shell game and mislead
investors about the value of stocks, bonds and other assets
held by pension plans. While they can fluctuate widely, the
rules let companies smooth the numbers, creating distortions
in their balance sheets that can make a whopping liability
look like a sizable asset.
That led the Financial Accounting Standards Board, which
sets U.S. accounting rules, to announce late last year that
it planned an overhaul.
"While the accounting and reporting issues do not appear to
lend themselves to a simple fix, the board believes that
immediate improvements are necessary," board Chairman Robert
The changes will come in two steps, the group said.
By year's end, the board says it likely will require
companies to report the funding status of pension plans and
other retirement benefits on their balance sheets, showing
how much those plans contain compared with what is owed to
A second phase of changes would reach much farther and take
several years. They would require companies to more
accurately measure and report their retirement benefits and
include those costs in calculating their profits.
For some companies, the change in their reported financial
condition would be stark.
The most widely cited example is General Motors Corp., which
has been staggered by both slowing sales and mammoth
obligations to workers and retirees. If GM were forced to
accurately show its true benefit costs on its balance sheet,
the company's book value, the difference between its assets
and liabilities, would have been cut from $27.7 billion in
2004 to a negative $18.5 billion, according to Credit Suisse
The changes are likely to stir far more controversy than the
Financial Accounting Standards Board's requirement that
companies account for stock options, partly because of their
perceived impact on Main Street, said Janet Pegg, an analyst
for Bear Stearns.
"It definitely could be a bigger deal," Pegg said. "Stock
options were often thought about as compensation given to
top executives who were making significant salaries, whereas
the view when you get to pensions is of Grandma and Grandpa
sitting at home collecting their pension checks."
When companies, under pressure from Wall Street to report
steady and predictable profits, are forced to take big
charges against their profits because of the volatilities of
their pension plans, more firms companies could decide
they've had enough, analysts say.
That may not happen this year, though some companies could
blame the new rules in coming months as they announce
pension freezes or cutbacks in retiree health care already
But as the second phase of the accounting overhaul is
completed, "that's going to be a more substantial change,"
said Don Fuerst, a retirement consultant and actuary with
Mercer Human Resource Consulting. "That's going to drive a
lot more companies to reconsider how they do this."
Of course, new rules won't change the reality of what
companies owe their workers or how much they've put aside.
But Credit Suisse's Zion points to the early 1990s, when the
Financial Accounting Standards Board began requiring
companies to put a value on the retiree health care promises
they had made. Within a few years, the number offering
those benefits had dropped sharply.
"Not to blame the rules," Zion said, "but you change the
rules and it provides a realization of the real economics."