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On
the Job: Incentive to cheat on pensions "With pension accounting, people have an incentive to cheat."-- Warren Buffett, the world's second-richest man Warren Buffett, chief executive at Berkshire Hathaway Inc., said current pension accounting rules encourage companies to mislead investors by pumping up earnings. Company executives approaching retirement have a special incentive to maintain unrealistically high estimates of expected returns as a way to artificially increase profits, Buffett said while attending a conference in Sun Valley, Idaho, recently.
Accounting rules call for companies to report expected gains in pension investment returns, even when they suffer losses, as a way of reducing volatility. These rules allow companies to boost profits. Nine of the largest U.S. companies turned $30.6 billion in actual pension fund losses in 2002 into pretax earnings of $7.9 billion, federal filings show. "The accounting is so confusing, it makes it easier to cheat with all the assumptions involved," said David Zion, an accounting researcher at Credit Suisse Group's Credit Suisse First Boston unit in New York. The U.S. accounting rules, developed in 1985 by the Financial Accounting Standards Board, require using estimates rather than actual returns on pension fund investments to "smooth" the effect of stock market changes from year to year. Robert Herz, chairman of the standards board, said in a March interview that he would like the rule to be changed to reflect actual pension results. "If you're 63, you've got two more years running your company," Buffett said. "Whether you change the pension assumptions and screw up your earnings for the last couple of years -- not a tough decision for most of them." Officials at the Securities and Exchange Commission, after reviewing more than 500 annual reports filed last year, have said companies didn't provide enough information to investors about their pension losses. Alan Beller, director of the SEC's division of corporation finance, has questioned the estimated rates of return used by some companies in their pension fund accounting, which turns losses into gains in annual earnings reports. If actual pension losses had been counted in financial statements, aggregate earnings for companies in the Standard & Poor's 500 Index would have been 69 percent lower than the companies reported for 2001, or $68.7 billion rather than $219 billion, Credit Suisse's Zion found in a research study on pension accounting published last September. Stock market declines in the past two years have led to more than $200 billion in pension-fund losses for S&P 500 companies, according to the Credit Suisse study. General Electric Co. said in its annual report released in March that its post-retirement benefit plans contributed $806 million to earnings last year before taxes. Investors had to read a footnote 37 pages later to learn the company's pension plan actually lost $5.25 billion, equal to 29 percent of the company's pretax earnings. General Electric followed accounting rules in reporting positive pension earnings. It used an expected rate of return -- an estimated gain of 8.5 percent -- on its income statement, rather than the actual return, which was a loss of 11.7 percent. The pension investment loss for 2002 wasn't disclosed in General Electric's 26-page management discussion and analysis section. It appeared in a financial footnote in a different part of the report and that type of disclosure is allowed under accounting rules. SALARIES & BENEFITS
Growing and shrinking paychecks: Although pay often grows marginally from year to year, workers in a handful of professions have seen some hefty increases and jarring drops in compensation, according to data collected by the federal Bureau of Labor Statistics. Among the biggest gainers were physician assistants, who saw their pay jump 23 percent from 2001 to last year, improving to $53,700. Other professions experiencing sizable salary increases included agricultural engineers, whose salaries increased by $10,036; purchasing managers, with an $8,372 rise; archivists and curators, up $7,020; and authors, up $5,928. The salary data were analyzed by Challenger, Gray & Christmas, the outplacement and research firm. On the other end of the paycheck were economists, public relations practitioners, financial planners, urban planners and law instructors. They all saw their salaries decrease by the largest amount, according to the government's data. Law instructors, for example, saw their median income drop by more than $16,000 annually. Other positions related to business also saw decreases: economists, whose salaries fell by $5,148; public relations specialists, down $3,328, and financial planners, off $2,236. Copyright ©
2002 Global Action on Aging
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