Funding Fun House

Detractors say current accounting lets companies distort the picture they present of pension plan performance.

Zion is not alone in his call for clearer accounting. Last summer, S&P released a new measure, known as core earnings, that removes pension gains and expenses from operating income. “It’s almost always a gain because you get to set the estimated return,” says David Blitzer, managing director and chairman of S&P’s core earnings committee. “We figure it out and then back it out of earnings.” S&P then adds back interest and service costs that companies pay on their plans, which the agency considers part of the cost of employee compensation. “We think this is the right way to do it,” says Blitzer. That doesn’t mean he wouldn’t also like to see accounting itself separate the effects of a pension plan from company results. “It has nothing to do with the way the business runs,” he says.

Mercer’s Kra believes the current setup prevents many plan sponsors from fully understanding the risks to which the plans expose their companies. “If the Dow were to close at 7,000 for a couple of years in a row, you would see many companies that are pulled under by their pension plans,” he says. The United Kingdom has modified its accounting rules to put assets and liabilities on the balance sheet and mark them to market, and Kra believes it’s quite possible that this could become the system here as well, thanks to the convergence project between the Financial Accounting Standards Board and the International Accounting Standards Board. “I would be shocked if the system we have today were still in place in six months,” he says.

The issue currently isn’t on FASB’s agenda. But the board recently decided to survey analysts and investors to see whether it should be added, and chairman Robert Herz recently told Reuters that he personally dislikes the U.S. approach.

Bad-News Bearers

Granted, companies whose pensions are in the worst shape have shed more light on their accounting. GM, Ford, and IBM have all recently held conference calls with investors to talk expressly about the status of their pension plans, and Ryder Systems posted a white paper on its Web site in November that outlined its expectations for its pension plan. “Companies are trying to give as much information on their pension plans as possible,” says Art Garcia, controller of Ryder Systems Inc. While Garcia says that he does not favor changing the accounting for pensions, he does advocate more disclosure. Whether finance executives will continue to disclose more when things improve, though, and pension plan accounting is helping the bottom line, remains to be seen.

Kevin Wagner, a consulting actuary at Watson Wyatt, thinks better disclosure for pension plans is here to stay. “Companies have found it very beneficial to make the financial details of pension plans more transparent to investors,” he says.

Not everyone is so confident. S&P’s Blitzer expects many companies to wait until year’s end to reveal problems. Yet he warns that in the current environment, fewer companies will find they can hide behind complex accounting. “If it’s material,” says Blitzer, “you’d better own up to it soon.”

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