By ADAM GELLER
AP Business Writer
t may sound arcane, but a planned over-
haul of the way companies keep their
books on pensions and retiree health care
plans could come at a very real cost to work-
ers counting on those benefits.
The changes _ likely to begin by year's
end _ come as a growing number of compa-
nies 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 pen-
sion benefits to most U.S. salaried employees
it hires beginning March 1.
But some experts say new regulations
requiring companies to more accurately cal-
culate and show the cost of their retirement
promises could speed up the move by employ-
ers away from guaranteed pensions and other
benefits.
"Changing accounting rules can cause
companies to change their behavior," said
David Zion, an accounting analyst with Cred-
it Suisse First Boston.
Rules now in place give companies cover.
Many have made expensive retirement prom-
ises without putting aside all the money need-
ed to meet them. But they don't have to fully
disclose the shortfalls in their earnings state-
ments or on their balance sheets.
Instead, firms can post very positive num-
bers 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 dif-
ficult to decipher.
"If you change those rules you take that
protection away and our thinking is a com-
pany may have to go out and protect them-
selves," Zion said.
The question is how quickly that will
happen and how transparent it will be given
the rapid cutbacks in benefits already under
way.
By law, companies can cut retiree health
benefits at any time, as long as the changes
don't discriminate. They can't yank pen-
sions, 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 man-
age for their own retirement. Small firms
started the trend, but in the past year some
large employers followed suit in freezing pen-
sions for at least some of their workers, includ-
ing 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 com-
panies smooth the numbers, creating distor-
tions in their balance sheets that can make
a whopping liability look like a sizable asset.
That led the Financial Accounting Stan-
dards 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 immedi-
ate improvements are necessary," FASB Chair-
man 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 sta-
tus of pension plans and other retirement
benefits _ showing how much those plans
contain compared to what is owed to work-
ers _ 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 retire-
ment benefits, and include those costs in cal-
culating their profits.
For some companies, the change in their
reported financial condition would be stark.
The most widely cited example is Gen-
eral Motors Corp., which has been staggered
by both slowing sales and mammoth obliga-
tions 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 bil-
lion, 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 prof-
its _ 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 pen-
sion freezes or cutbacks in retiree health care
already being planned.
But as the second phase of the account-
ing 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 work-
ers or how much they've put aside. But Cred-
it Suisse's Zion points to the early 1990s,
when FASB began requiring companies to
put a value on the retiree health care prom-
ises 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 real-
ization of the real economics."
Overhaul in accounting rules could tighten squeeze on pensions
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Secure Your Future
January 29, 2006
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