Pension Crisis Will Worsen in 2003

With retirement-plan funding headed for a crisis, FASB contemplates possibility of accounting rule changes. Also: CPAs prod SEC to broaden rules on misleading auditors.


So much for the two-month stock market rally.

The corporate pension crisis is expected to get much worse in the next year or so as the nearly three-year bear market has forced many companies to make contributions to their defined-benefit plans to cover shortfalls and comply with federal laws that protect workers’ pensions.

In 2002, about 30 percent of the plans will require contributions, according to a Watson Wyatt analysis of the financial statements of some of the country’s biggest companies. This figure, though, could more than double to 65 percent in 2003 if current conditions don’t improve.

This compares with just 15 percent of employers that made pension plan contributions in 2000 and 25 percent in 2001.

In fact, Watson Wyatt said only about 40 percent of pension plans had assets in excess of plan liabilities as of January 1, 2002, down from about 85 percent in 2000. If current economic conditions persist, only about 20 percent of plans will have enough funds to fully cover liabilities in 2003, it added.

“Pension funding laws were originally developed to allow employers to budget pension contributions over time with flexibility, so they could fund more in good times and less in bad times,” says Kevin Wagner, a retirement practice director with Watson Wyatt. “But with numerous changes to funding rules over the past 15 years, today’s laws have precisely the opposite effect.”

The benefits-consulting firm points out that current law requires an annual comparison of the market value of a plan’s assets with its current benefit liability.

Here’s the interesting part: if the ratio falls below 0.9, the plan may be subject to additional minimum funding requirements above and beyond “normal” funding requirements. However, if the ratio exceeds 1.0, plan contributions may not be deductible. What a difference 0.1 makes.

As a result of this narrow range, contributions tend to be volatile from year to year. In fact, because of the market’s collapse, many plans went from a situation where they were not eligible for a deduction to one of major underfunding.

“The bottom line is that if employers aren’t given more flexibility in terms of when they can or can’t make pension plan contributions, they won’t sponsor these plans,” notes Wagner in his statement. “Without orderly funding, employers have difficulty managing other important costs, including pay budgets and technology investments. And ultimately, this hurts employees the most.”

To smooth the pension funding process, Watson Wyatt proposes, an employer’s current liability should be based on interest rates in effect as of the date of the plan’s valuation rather than on the current liability based on a four-year weighted average of 30-year Treasury bonds. “This measurement represents a much more accurate measure of the plans’ funded status at the valuation date,” said Wagner.

FASB Mulls Pension Rule Changes

The corporate pension crisis has caught the attention of the nation’s accounting-rule maker.

The Financial Accounting Standards Board (FASB) plans to discuss during upcoming meetings whether to change the way companies must account for pension income and expenses, chairman Robert Herz told Reuters in an interview.

According to Reuters, FASB is reaching out to analysts and fund managers to help determine whether it should add a project on pension accounting to its agenda.

Herz told the wire service that The Financial Accounting Standards Advisory Council (FASAC), which plays a critical role in whether FASB proceeds on major accounting issues, will discuss the pension accounting issue at its meeting this week.

He also said a new advisory council that FASB is forming will discuss the issue later on. This group will be comprised of Wall Street analysts, hedge fund managers, and others who scrutinize financial statements.

However, don’t count on changes anytime soon. Herz conceded in the interview that FASB is not likely to add such a project to its agenda until at least next year.

Clearly if it were only up to Herz, FASB would make major changes. “I’m not too fond of pension accounting,” he told Reuters. “It is complex, it’s somewhat opaque.”

Herz said the key issue would be whether FASB permits companies to calculate pension costs with a “smoothing approach,” in which companies spread pension costs over several years. The reason: current pension accounting permits the use of a long-term rate of return from assets rather than relying on actual returns, and allows companies to amortize gains and losses on investments.

AICPA to SEC: Get Tougher

The American Institute of Certified Public Accountants (AICPA) called on the Securities and Exchange Commission to broaden a key rule when it implements the Sarbanes-Oxley Act.

The AICPA said in its comment letter to the SEC that it “strongly supports” the SEC’s recommendation to prohibit any officer or director of an issuer of financial statements that are being audited, or anyone else acting under his or her direction, from misleading an auditor.

However, it recommended that the proposal be broadened to include not only officers and directors but also anyone—whether internal or external to the company—who lies to or misleads an auditor.

“Any action by any person involved in the preparation of the financial statement or in the production of information for the auditor to use in the audit to influence, coerce, manipulate, or mislead the auditor will have an adverse impact on the ability of the auditor to do his or her job,” the AICPA wrote in its letter. “Therefore, to further protect the public interest, we would propose that the Commission’s recommendation be broad enough to cover any person, whether internal or external to the issuer, who acts improperly in this regard.”

The letter, signed by AICPA chairman William F. Ezzell and president and CEO Barry C. Melancon, further stated, “Implementing such a broad prohibition on misleading auditors is a necessary component of restoring investor confidence in the accuracy and integrity of financial statements.”

Hewitt Sees No Boost in Bonuses

‘Tis the season to give bonuses…or is it?

It seems most companies these days play Scrooge when it comes to handing out extra goodies to their rank and file.

According to consulting firm Hewitt Associates, most companies do not offer a holiday bonus.

However, those in the generous minority don’t figure to change their plans from last year, said Hewitt.

It turns out that 67 percent of 432 companies surveyed in its “2002 Holiday Bonus and Gift Study” will not offer any type of holiday bonus—for example cash, gift, or food—this year. But this is consistent with recent trends, said Hewitt, which added that studies have shown that the percentage of companies not giving a holiday bonus has ranged between 64 percent and 69 percent since 1999.

In fact, 51 percent of the companies that participated in the study have never had a holiday bonus, while 16 percent had a program that was discontinued.

Of those companies that canceled their holiday bonus initiatives, 7 percent did so before 1980, 9 percent did in the 1980s, 47 percent did so in the 1990s, and 37 percent discontinued their programs between 2000 and 2002, according to Hewitt.

Why did companies cut back on these programs? A majority (59 percent) cited cost, followed by entitlement issues (34 percent) and the development of pay-for-performance plans (24 percent).

“Companies don’t use these awards as performance incentives,” said Hewitt’s Ken Abosch in a statement. “Those organizations that are seeking alignment between performance and awards have turned their focus to variable pay incentives, which are designed to help employees concentrate on company goals and objectives, while eliminating ‘entitlement’ issues that often arise with a holiday bonus plan.”

Of the 33 percent of companies that have a holiday bonus program, 39 percent provide a cash bonus, 36 percent give a gift certificate to a local retailer, and 28 percent reward employees with a gift of food, like a turkey or a ham.

The monetary value of bonuses and gifts varied greatly by award type.

For example, cash awards tended to have the highest value, with the companies spending a median of $200 per employee. Companies that award gift certificates typically spend $25 on each worker, while a food gift costs a median price of $20 per employee.

“For some companies, a holiday bonus is part of their culture and helps define the organization,” said Abosch. “Meanwhile, other organizations use a holiday bonus as a way to build morale and thank employees for their efforts during the past year.”

Other findings from the Hewitt survey:

  • 80 percent of companies have at least one type of variable pay or pay-for-performance plan in place, up from 70 percent in 1999 and 51 percent in 1991.
  • Of the companies that never offered a holiday bonus program, 47 percent said it was because of cost, 40 percent simply never considered such a program, and 38 percent said that a holiday bonus was not consistent with their reward philosophies.
  • 62 percent of the companies providing holiday bonuses budgeted less than 1 percent of payroll expenses for these awards, while 19 percent budgeted between 1 percent and 2 percent of payroll.
  • 64 percent of the 432 companies surveyed host a holiday party.

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