FASB Delays Pension Decision That Could Hurt Balance Sheets

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FASB Delays Pension Decision That Could Hurt Balance Sheets

By CASSELL BRYAN-LOW, THE WALL STREET JOURNAL

May 29, 2003

Accounting-standards setters postponed a decision that would make a certain type of pension plan more of a burden to companies' balance sheets.

The Financial Accounting Standards Board says it needs more time to study the rule change and plans to revisit the issue as early as next month. The proposed change, which has been contested by major companies such as Allstate Corp., Citigroup Inc., and State Street Corp., would force employers offering certain cash-balance pension plans to change the way they calculate their obligations to workers. The change would require employers to use the same interest rate they use for crediting employees' accounts -- typically the yield on various government securities -- to calculate this obligation in present-day terms.

Currently, companies calculate their obligations for all kinds of pension plans using the yield on high-quality corporate bonds. Because the yield on government bonds is typically lower than that of corporate bonds, companies would be using a lower rate to calculate what their future obligations would cost in today's terms; the lower the interest rate, the bigger the liability on their balance sheets.

Indeed, compensation consultants estimate that a change along those lines could mean an increase of 20% to 30% in liability for some companies, but could vary widely. Roughly a third of the largest companies in the U.S. now offer cash-balance plans, most of which would be covered by the change as had been proposed. It isn't clear how many would be hit with a higher liability under the proposal.

Some companies, including New York financial-services giant Citigroup, have expressed concern that the increase could trigger many companies to take a reduction in shareholder equity on their balance sheets. Such reductions are a potential concern to shareholders because it changes the picture of how risky the balance sheet looks. In a May 27 letter to rule makers, Citigroup said that in order to avoid such an outcome, "plan sponsors may freeze or terminate their pension plans."

"We are pleased with the decision" to take more time to consider the issue, said a spokeswoman for Allstate, the Northbrook, Ill., insurer. A representative for State Street, a Boston financial-services company, couldn't be reached.

FASB staffers, who back the change, say that because the nature of cash-benefit plans differs from that of traditional pension plans, so, too, should the calculation of a company's obligations. A FASB spokeswoman said the board may still decide to implement the change but wanted to take time to consider aspects such as the variation in plan designs and comments from employers and others who would be affected by a change.

Since the 1980s, companies have increasingly switched to cash-balance plans, which are popular with employers, in part because switching to a cash-balance plan can mean a smaller obligation for a company with an older work force.