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Pensions Moving Towards Front Burner

Aug 30

Written by: Jack Ciesielski
8/30/2007 4:00 AM

Yesterday’s FASB meeting saw pension and OPEB standards creep back into a higher priority category than they’ve been for a while. Last year saw the the issuance of Statement 158, which put net benefit plan balances onto firm balance sheets; since then, there’s been hardly a peep about Phase 2 of the revamp of the benefit plan accounting standards.

The FASB staff proposed action on five areas (meeting handout here):

• Earnings smoothing (the expected return on assets mechanism and delayed recognition of events like market losses)

• Recognizing a single unit of cost (instead of the current stew service & interest costs, plus various amortizations and expected returns)

• Measurement of benefit obligations

• Disclosures (some would like more; others less. The staff’s proposal was that the Board should work the current derivatives disclosure project into this project)

• Getting some accounting standards - or at least disclosures requirements - worked into the accounting literature for multiemployer plans. (Currently, there’s not much accounting done for these.)

The Board seemed to agree that the issues were the right issues. Expect that they’ll keep a close watch on the IASB’s similar project which is a bit further along, and attempt to borrow what they can in an effort to keep things moving and to maintain the convergence process.

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Pension & Other Benefit Plans: A Look Ahead

Investors in firms with defined benefit pension plans always face the risk of suddenly being pushed farther back in line when it comes to being served their returns. Variability in plan assets and variability in benefit plan obligations are the reason: poor asset returns coupled with sinking interest rates always spell tough times for defined benefit plan funding. In that regard, this year’s asset returns combined with the Fed’s “Operation Twist” add up to “Operation Agony” for defined benefit pension plans. If trends continue along their current path, firms that may have anticipated moving to more realistic pension accounting - like Honeywell, AT&T and Verizon already have done - might forego that decision. It could be just too painful.

Pensions aren’t the only kind of benefit plan affected by Operation Twist. Other postemployment benefit (OPEB) plans share much the same accounting model as pensions, including the calculation of a projected benefit obligation that similarly incorporates a discount rate - one that will also be affected by Operation Twist. The net OPEB obligations were slightly less than pension obligations at the end of 2010, but also promise to grow in 2011. Investors perceive them as less threatening than pension obligations because they don’t require funding. Strangely, there are a number of firms that are recognizing income from these benefit plans - without ever creating a dime of cash for investors.

A recent edition of The Analyst’s Accounting Observer dissects these issues, and is available only to paid subscribers. A condensed version is available for free upon request. To receive it, send an e-mail to Brenda Rappold at brappold@accountingobserver.com, with “PENSIONS” in the subject line.

For information about subscribing to The Analyst’s Accounting Observer, click here.