Pension Rule May Wipe Out Equity
Accounting Change Moves Costs Onto Balance Sheets
Albert B. Crenshaw
Washington Post Staff Writer
Thursday, April 13, 2006
Pending changes in the way corporations are required to account
for the costs of their pension plans would have wiped out more
than $220 billion in shareholder equity at the nation's largest
companies and reduced the "net worth" of some them, including
General Motors Corp., to less than zero had they been in effect
last December, according to a study released yesterday.
The study of 100 of the nation's largest private pension plans
by the Milliman consulting firm found that the new accounting
rules may pose a serious threat to the shrinking number of
companies that sponsor these traditional "defined-benefits"
pensions. The rules could make balance sheets look weaker,
sometimes even when pension plans are fully funded, the study
said. Already, many companies, including International Business
Machines Corp., have "frozen" their pensions, opting instead to
shift to 401(k) and similar plans in which the investment risk
is born by workers and retirees.
The rules, promulgated recently by the Financial Accounting
Standards Board, a private group that sets the standards for
financial statements by public companies, are designed to
provide more clarity about a company's true assets and
liabilities. The goal is to make "basic financial statements
more complete, useful, and transparent," George Batavick, a FASB
member, said last month.
Until this year, most pension figures were carried in footnotes
to financial statements and brought onto the actual statement
only over time. The new rules will require companies to compute
their plans' net funded status -- assets minus liabilities -- at
year-end and include that figure on the balance sheet.
This will cause "a significant hit" to shareholder equity of
many companies, Milliman's John W. Ehrhardt said. It will hit
not only companies with underfunded pension plans but will also
reduce shareholder equity at a number of companies whose plans
are in surplus. This is because it will require companies to
move certain costs that have been reported in footnotes onto the
For example, GM, whose pensions showed a $4.6 billion deficit
under current rules, would see its equity reduced by $31.6
billion, the study found. General Electric Co., despite a $2.9
billion pension surplus, would see a $10.3 billion reduction in
Milliman found only three companies in the 100 it surveyed that
would see a rise in shareholder equity under the new rules: FPL
Group, a Florida utility; Berkshire Hathaway Inc.; and Merrill
Lynch & Co.
Milliman officials did not speculate on the market impact of the
reductions in shareholder equity.
The review also found that the financial condition of the
pension plans in the study improved last year, but most
continued in the red, compared with the benefits they have
promised to pay eventually.
These plans in the aggregate had assets adequate to pay 92.2
percent of their "projected benefit obligation," which is the
pensions they must pay after factoring in future pay increases
for workers. That is up from 82.9 percent at the end of 2002.
But they still were short by about $96 billion at the end of
last year, though that figure was down from $163.5 billion at
The report also showed that, for the third consecutive year,
pension assets yielded a better return than companies had
projected in their financial statements. However, continuing
low interest rates, which amplify the value today of future
liabilities, kept most plans in the red.
Ehrhardt noted, though, that if interest rates remain at the
levels they have already risen to this year and pension assets
return 10 percent for the year, the $96 billion aggregate
deficit shown by the plans in the survey would become an $80
billion surplus by year-end.