The Association of U S West Retirees



Pension Rule May Wipe Out Equity
Accounting Change Moves Costs Onto Balance Sheets

By 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 balance sheet.

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 equity.

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 year-end 2002.

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.