Overhaul in accounting rules could tighten squeeze on pensions

NEW YORK -- It may sound arcane, but a planned overhaul of the way companies keep their books on pensions and retiree health-care plans could come at a very real cost to workers counting on those benefits.

The changes -- likely to begin by year's end -- come as a growing number of companies freeze pensions and cut retiree health benefits, shifting risks and costs to workers. In recent weeks, IBM Corp. and Verizon Communications Inc. have joined the list of those announcing they will freeze their pension plans. On Monday, aluminum giant Alcoa announced it will no longer offer pension benefits to most U.S. salaried employees it hires beginning March 1.

But some experts say new regulations requiring companies to more accurately calculate and show the cost of their retirement promises could speed up the move by employers away from guaranteed pensions and other benefits.

"Changing accounting rules can cause companies to change their behavior," said David Zion, an accounting analyst with Credit Suisse First Boston.

Rules now in place give companies cover. Many have made expensive retirement promises without putting aside all the money needed to meet them. But they don't have to fully disclose the shortfalls in their earnings statements or on their balance sheets.

Instead, firms can post very positive numbers based on assumptions about investment returns, when the actual returns would hurt their results. And while companies are required to disclose pension figures in footnotes to financial statements, even those can be difficult to decipher.

"If you change those rules you take that protection away and our thinking is a company may have to go out and protect themselves," Zion said.

The question is how quickly that will happen and how transparent it will be given the rapid cutbacks in benefits already underway.

By law, companies can cut retiree health benefits at any time, as long as the changes don't discriminate. They can't yank pensions, but can freeze pension plans. Such moves leave workers eligible for benefits already earned, but halt gains they would have been entitled to in later years on the job. Other firms have closed pension plans to newly hired workers.

Many companies freezing pensions say they are bolstering 401(k) plans, making set contributions while leaving workers to manage for their own retirement. Small firms started the trend, but in the past year some large employers followed suit in freezing pensions for at least some of their workers, including Sears Holding Corp. and Hewlett-Packard Co.

Pensions and other retirement benefits have stirred controversy in accounting circles for years. Critics say while companies made expensive promises to workers, accounting rules let them engage in a shell game and mislead investors about the value of stocks, bonds and other assets held by pension plans. While they can fluctuate widely, the rules let companies smooth the numbers, creating distortions in their balance sheets that can make a whopping liability look like a sizable asset.

That led the Financial Accounting Standards Board -- which sets U.S. accounting rules -- to announce late last year that it planned an overhaul.

"While the accounting and reporting issues do not appear to lend themselves to a simple fix, the board believes that immediate improvements are necessary," FASB Chairman Robert Herz said.

The changes will come in two steps, the group said.

By year's end, FASB says it likely will require companies to report the funding status of pension plans and other retirement benefits -- showing how much those plans contain compared to what is owed to workers -- on their balance sheets.

A second phase of changes would reach much farther and take several years. Those changes would require companies to more accurately measure and report their retirement benefits, and include those costs in calculating their profits.

For some companies, the change in their reported financial condition would be stark.

The most widely cited example is General Motors Corp., which has been staggered by both slowing sales and mammoth obligations to workers and retirees. If GM was forced to accurately show its true benefit costs on its balance sheet, the company's book value -- the difference between its assets and liabilities -- would have been cut from $27.7 billion in 2004 to a negative $18.5 billion, according to Credit Suisse estimates.

The changes are likely to stir far more controversy than FASB's requirement that companies account for stock options, partly because of their perceived impact on Main Street, said Janet Pegg, an analyst for Bear Stearns.

"It definitely could be a bigger deal," Pegg said. "Stock options were often thought about as compensation given to top executives who were making significant salaries, whereas the view when you get to pensions is of grandma and grandpa sitting at home collecting their pension checks."

When companies -- under pressure from Wall Street to report steady, predictable profits -- are forced to take big charges against their profits because of the volatilities of their pension plans, more firms could decide they've had enough, analysts say.

That may not happen this year, although some companies could blame the new rules in coming months as they announce pension freezes or cutbacks in retiree health care already being planned.

But as the second phase of the accounting overhaul is completed, "that's going to be a more substantial change," said Don Fuerst, a retirement consultant and actuary with Mercer Human Resource Consulting. "That's going to drive a lot more companies to reconsider how they do this."

Of course, new rules won't change the reality of what companies owe their workers or how much they've put aside. But Credit Suisse's Zion points to the early 1990s, when FASB began requiring companies to put a value on the retiree health care promises they had made. Within a few years, the number offering those benefits had dropped sharply.

"Not to blame the rules," Zion said, "but you change the rules and it provides a realization of the real economics."