Let's assume that the U.S. Congress cuts through a political briar patch and passes a law that forces full disclosure of pension debts...
Let’s assume that the U.S. Congress cuts through a political briar patch and passes a law that forces full disclosure of pension debts.
The consequences might be stunning. Companies with poorly funded pension plans might have to contribute billions of dollars more to their retirement plans and touch off worker demands that employers pony up even more money for their retirement security.
Just as surely, investors would punish companies with the highest retirement debt, according to a study by David Zion and Bill Carcache, analysts for Credit Suisse First Boston. They examined the effect of fully disclosing and accounting for the pension liabilities of the 374 companies in the Standard & Poor’s 500 index with defined-benefit plans. “We estimate that would cause the total shareholder’s equity for the companies in the S&P 500 to drop by $255 billion, or 7 percent,” they wrote in their report.
The 18 most underfunded companies would fare worse, suffering a 25 percent reduction in shareholder’s equity.
Zion and Carcache figure that shareholder equity — a company’s total assets minus total liabilities (which should include what it owes its pension program) — would be wiped out at the seven S&P 500 companies with the biggest funding gaps in their pension plans.
This accounting muddle is huge. The Credit Suisse analysts said that pension assets and liabilities are treated as “off-balance-sheet” items, which distort how much a company really earns and holds in corporate assets.
They estimate that only 21 percent of the $1.3 trillion in S&P 500 pension fund assets are currently reported on balance sheets.
There is no way that employees or investors now can discern total pension debts since companies don’t have to report their so-called 4010 liabilities to the public. That’s the amount owed if a company terminates its defined-benefit plan and has to buy annuities for workers.
Only Congress, the Pension Benefit Guaranty Corp. (PBGC) — the quasi-government pension insurer — and employers know the 4010 numbers.
They are prohibited by current law from releasing them, although several proposed laws call for making this information public.
“If you’re a real weak company, the market would be very interested in that [termination liability number],” said Ron Gebhardtsbauer, senior fellow at the American Academy of Actuaries, a professional association in Washington.
Employers have opposed disclosure of their funds’ termination liabilities, arguing that it’s not an accurate picture of their pension debts.
What is indisputable is that struggling companies often have grossly underreported their pension liabilities.
Earlier this year, when the pension agency took over the plan for 36,000 ground employees of United Airlines parent UAL, it was discovered that only $1.2 billion in assets were set aside to cover $4.1 billion in pension promises. A separate UAL plan for the pilots had $2.8 billion to cover $5 billion in obligations.
Employees often have no idea how much their pension funds are owed. Because of inadequate laws covering disclosure, what information they do get is sketchy and based on information that is two years old.
Companies with more than $50 million in pension funding gaps are required to file 4010 reports with the PBGC, warning the pension insurer of shortfalls.
In 2002, 270 U.S. companies alerted the PBGC to underfunding problems. Those filings, which included all of the companies covered by PBGC insurance, jumped to 404 in 2003 and 430 in 2004.
Bloomberg News has made several requests to obtain information on specific companies mentioned in 4010 filings and has been denied access.
A rule change being considered by the Financial Accounting Standards Board, the governing body of corporate accounting, would force companies to be more forthcoming about their retirement debts. The Bush administration and the pension agency support the revision.
“The current restriction of 4010 [true pension liability] data does not serve the interests of employees, retirees or investors,” said Bradley Belt, executive director of the pension corporation.
Belt’s agency had a $23 billion deficit in the fiscal year ended Sept. 30, as failing corporations dumped their pension plans in the PBGC’s lap.
The agency said its potential losses from pension plans sponsored by financially weak employers rose to $108 billion from $96 billion the year before. Full disclosure usually illuminates boardroom secrets and in this case might lead to changes.
Companies that conclude that their defined-benefit plans are too expensive might trigger freezes or shutdowns of old-style pensions. Pension-fund managers may even sell stocks to reduce the overall risk profile of their portfolios and buy bonds.
Ultimately, knowing how pensions are funded will force investors large and small to educate themselves. They will also need to focus more on lowering risk and expenses to better achieve their retirement goals. No matter what the political or economic climate, that’s a sound practice.