| The
demise of the private pension plan | | |
| Trick accounting
To
make matters worse, the assumptions used by companies to determine whether they
have enough money in their pension accounts are so dodgy that they're now under
scrutiny by the Securities and Exchange Commission. The concern is that companies
can fudge the numbers concerning future pension obligations as well as the quarterly
profits they report to shareholders.
For instance, the discount rate
is one assumption that companies use to determine whether they have
enough money in their pension funds. That rate is used to calculate
the present value of the money companies will need to pay future
benefits. That's a tough concept to wrap your mind around, I know.
But variations in the discount rate, even by as little as a quarter
of a percentage point, can make a pension fund look flush or, conversely,
anemic. The lower the discount rate used, the more money a company
must pile into a fund. The higher the rate, the lower the pension-fund
obligation.
The
SEC is looking into how company managements arrive at the discount rate, and if
they are massaging their firms' rates to present healthier, though inaccurate,
fiscal reports to shareholders. Companies, ever mindful of
the effect of quarterly results on shareholders, can also, quite legally, "smooth"
their earnings numbers over a period of years by using an "assumed"
return for their pension plans rather than the actual return. Thanks to an accounting
quirk, the assumed performance of pension assets can be reflected in quarterly
net income. In a recent editorial, former SEC chairman Arthur
Levitt denounced the practice, saying "the smoothing of assets and obligations
masks underlying volatility and is producing financial statements that are deceptive."
In response to these complaints, the
Financial Accounting Standards Board announced in mid-November
that it is planning to address some of these accounting issues,
though approved changes won't go into effect until the end of 2006
at the earliest. One revision under consideration would require
that companies include their pension surplus or shortfall on the
balance sheet (instead of in the footnotes, where it currently resides).
Also, changes in the value of the pension asset or liability would
be excluded from net income.
The move to strengthen
pension rules
In 2004, Congress passed a two-year measure that enabled
companies to use a corporate bond rate as its discount rate, rather than the lower
30-year Treasury rate. That gave companies some breathing room, enabling them
to put less money in their pension funds. But the tide has
reversed, and the Bush administration is now pushing for tougher pension-funding
rules. In theory, that's a great idea. Companies shouldn't get away with any shenanigans
with respect to something as sacrosanct as their employees' pension plans. But
critics say that if regulations become too tough, that will cause more companies
to terminate or freeze their plans, and that that's what the Bush administration
ultimately wants: to free businesses of onerous pension obligations. | 
