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Rule lets companies turn pension losses to gains

By: David Evans, Seattle Post-Intelligencer

March 24, 2003

Nine of the largest U.S. companies, following U.S. accounting rules, obscured $30.61 billion in pension-fund losses in 2002, according to footnotes in annual reports. Rule makers are now calling for reforms in how businesses account for their retirement plans.

Verizon Communications Inc., Lockheed Martin Corp., IBM Corp. and six other companies each lost more than $1 billion in pension-fund investments last year, while reporting pension gains in their income statements in annual reports.

Verizon, which said in a footnote that it lost $4.68 billion, reported a $2.5 billion pension gain. That accounted for 40 percent of its 2002 pretax earnings. U.S. accounting rules call for companies to include estimated pension gains, rather than actual returns, in their income statements. As a result of the rule, called FAS 87, the nine companies legally transformed $30.61 billion of pension losses into pretax earnings of $7.9 billion, annual reports show.

Last month, Securities and Exchange Commission officials said companies aren't providing investors with clear disclosure about pension accounting. Carol Stacey, chief accountant of the SEC's division of corporation finance, said in an interview that there was a "general lack of informative transparent disclosure" in more than 500 annual reports for 2001 reviewed with her staff.

Alan Beller, director of the SEC's division of corporation finance, said last month that actual pension returns should be included when companies discuss pension accounting and pension fund performance. "The actual rate of return is something that should be an element of that disclosure," he said.

The FAS 87 rule requires companies to use estimated pension investment gains, rather than actual gains or losses, to "smooth" away stock-market volatility, according to its primary author, Tim Lucas.

The FAS 87 rule requires companies to estimate long-term stock-market performance. The nine companies computed their 2002 pension earnings based on average expected rates of return of 9.2 percent.