Wednesday, September 13, 2006

Lurie on Valuing a Golden Egg: The FASB Revises Pension Accounting Rules

LurieAlvin Lurie, Editor of the NYU Review of Employee Benefits and Executive Compensation, adjunct faculty member at NYU, and Assistant Commissioner of Internal Revenue (Employee Plans & Exempt Organizations) under ERISA, sends word of a recent opinion piece that he wrote for Barron's Magazine on August 28, 2006 (subscription required) discussing the far-reaching consequences of a revision by the FASB of the pension accounting rules.  These rules are due to take effect this year.

Here's an abstract:

The year 2006 is proving to be the most momentous for pension plans since ERISA’s enactment  32 years ago, with the most drastic reform of retirement benefits since that earlier seminal law itself. Emerging in the shadow of that new law is a far-reaching revision by the FASB of the pension accounting rules to take effect this year, that could well overshadow the more widely discussed legislation.

Both initiatives focus particularly on funding of defined benefit plans, with the object of ensuring more certainty that pension promises will be fulfilled, the latter document especially intended to provide participants and other stakeholders with greater information about the financial health of plans. They will accomplish neither. What they are certain to achieve is the elimination of the fast shrinking population of traditional defined benefit plans. The FASB statement will reverse the long-standing FAS 87, principally by flushing information concerning pension underfunding out of the footnotes and onto the balance sheet proper, while changing the very way the pension liability is calculated for balance sheet purposes and drastically accelerating the recording of the liability.

Professionals have long agreed that funding and reporting is best done by filtering amounts onto the liabilities side of the balance sheet periodically, to avoid volatility from short-term economic factors, like interest, and future projected but not awarded wage increases. It has been estimated that, in the case of one prominent automaker, the change in accounting for pension and welfare benefits this year could increase the combined unfunded liabilities by a mere $68 billion, obviously with devastating impact on shareholders’ equity.

The article concludes with a call upon FASB (not likely to be heeded) to withdraw and  reconsider its rule change in  light of the new legislation, which does not appear to have entered into the accounting board’s deliberations.

Very interesting, provocative piece and Alvin makes a good point that the on-going deciphering of the Pension Protection Act of 2006 has forced this important change to pension accounting rules out of most people's minds.  Perhaps, with this piece, no more.


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