Like Sisyphus, who was condemned to roll a rock up a hill each day only to watch it roll back down again, pension plan sponsors can’t seem to make any progress. They poured record amounts of cash into their plans — an estimated $40 billion in 2004 on top of contributions of more than $70 billion in 2003 — to comply with federally mandated minimum funding levels, but mediocre stock market returns, persistently low interest rates, and ballooning retiree populations mean plans are in little better shape than they were in 2002. Now changes to accounting rules could compound the problem, if techniques to smooth volatility in pension obligations are eliminated, as some have threatened. As if that weren’t enough, the Securities and Exchange Commission is examining whether some companies toyed with pension plan assumptions to game financial results.
In October, six companies — Boeing, Delphi, Ford, General Motors, Navistar, and Northwest Airlines — announced that the SEC had asked them to provide more information about how they calculate their pension and other retiree-benefit obligations. The commission was seeking data on such assumptions as expected rates of return on assets, discount rates, and projected health-care cost increases.
With no apparent trigger for the timing of the investigation, the corporate world is buzzing with speculation about how and why the companies were chosen. The six under investigation were not those with the highest or even the most erratic rate-of-return assumptions. GM and Delphi, for example, held assumptions steady at 10 percent from 2000 to 2002, and dropped them to 9 percent in 2003. Honeywell, Pfizer, and Delta — companies that are not under investigation — did the same.
“Is it that the assumptions were so outlandish? I’m not so sure about that,” says Jack Ciesielski, editor of Analysts’ Accounting Observer. In fact, a recent report commissioned by the Committee on Investment of Employee Benefit Assets (CIEBA) put the actual median annualized asset returns for large corporate pension funds at 9.4 percent from 1993 to the end of 2003, higher than the average 8.8 percent return that companies assumed.
Although the SEC was characteristically circumspect about the course of its investigation, its aim is clear. “Among other things, we’re looking to see if companies have reverse-engineered the rates to get to a certain financial result,” says Kenneth Lench, an assistant director in the SEC’s enforcement division. Emphasizing that none of the companies is suspected of any particular wrongdoing, Lench says that “several factors,” including the size of the pension plans and other postemployment obligations, went into the selection of the six companies. Since even a small change in rates can have a huge impact on income, he says, “this is an area where we see potentially significant risks, and that’s why we’re taking a look at it.”
Such risks are hardly news to most investors. The vagaries of pension accounting and its impact on income have been well publicized since the market downturn of 2001, and the SEC has been addressing the issue in public speeches and private comment letters ever since. However, with issues of pension reform coming to a head at both the Financial Accounting Standards Board, which governs pension accounting, and Congress, which sets funding and payout requirements, plan sponsors fear that pensions will be less likely to receive the favorable treatment from regulators and legislators they need to stay viable. Even worse, public pressure could force new rules that increase the weight of the plans on firms’ balance sheets and income statements.