FASB to Reconsider Pension Proposal
U.S. accounting rule makers Wednesday said they would reconsider a proposal on valuing certain pension obligations, on concern the change could boost the financial liabilities many companies report on their books.
The proposal, which involves so-called cash-balance pension plans, has drawn sharp criticism from corporate America.
The Financial Accounting Standards Board, which sets U.S. accounting rules, asked its staff to reexamine the issue, taking into account the feedback it received.
The proposal was put forward by a task force at the board this month.
Under cash-balance plans, employees’ company-paid retirement benefits accrue over time, as with other plans. But at retirement each employee has a stated balance in his account.
By contrast, traditional pensions guarantee continuous payments for as long as a retiree lives, rather than a capped sum.
Hundreds of companies have converted traditional pension plans to cash-balance plans in recent years, including IBM Corp. and Delta Air Lines Inc. Many older employees have objected to the plans because of features that can lower their total retirement benefits.
The proposed rule would reduce the annual interest-rate return assumption many companies use in valuing their cash-balance plan obligations.
Many firms use a relatively high rate assumption. That has the effect of lowering the “present value” of the pension obligation on their books.
If firms assumed a lower rate of return on pension assets over time, their future liability, as reported in financial statements, could be considerably larger.
That, in turn, could force companies to pump more money into their plans, said Ethan Kra, chief actuary for retirements at Mercer Human Resource Consulting. Like many other pension consultants and companies, he opposed the move.
“This is not a bottomless pit that you can go to corporate America and say, ‘Pony up and keep paying,’ ” said Kra.
The ERISA Industry Committee, a nonprofit group that lobbies on employee-benefits issues on behalf of companies, estimated that lowering the interest rate assumption would, in some cases, increase reported plan liabilities by 20% to 40%.
The group also complained that the FASB had come up with a proposal without much discussion or a chance for feedback.
Separately, the board on Tuesday agreed that companies must disclose additional details of their pension plans, including the breakdown of assets such as stocks and bonds in the portfolio, the returns earned on them and more detail on the effects of pension obligations on cash flow.
The board plans to propose a rule on the issue this summer.
