Pension Dissension

There are other unsettling financial considerations in the proposed pension rules. For example, if companies are required to record their plans' funded status — assets minus liabilities — on their balance sheets, as opposed to footnoting it on their financial statements, many may be forced to renegotiate their loan covenants, possibly sinking them into default. A study by Milliman of 100 large U.S. corporations that sponsor defined-benefit pension plans indicated that if the proposed pension rules were in place in 2005, the pretax charge to shareholder equity would have increased by an aggregate $222.2 billion.

Mark White, CFO of technology firm SAP Americas, says if the PBO proposal is institutionalized, 25 percent of the S&P 500 would incur an average 8 percent reduction in shareholder equity. "The proposed reform will add volatility due to negative or low asset returns or interest-rate movements, either of which could generate losses, and these losses would need to be reflected immediately on the balance sheet," explains White. This will compel some companies to renegotiate with lenders to avoid falling into default, he contends.

"Many bank facilities contain covenants that have debt-to-equity ratios, minimum tangible-net-worth levels, or minimum working-capital requirements; these will be impacted by the reforms," says White. "If the PBO liability measure is instituted, it will increase the trend toward freezing pension plans." That trend continues to gain steam: a Watson Wyatt Worldwide study found that as of April, 113 of the country's 1,000 largest companies had terminated or frozen at least one pension plan, compared with 71 companies in 2004.

Made to Measure
Another sticking point is timing. Today, a company can take the measure of its pension plan up to three months before its fiscal year-end. FASB wants to eliminate that lag and have the measurement coincide with the end of the fiscal year. "Measuring pensions is a long, cumbersome process," says Verlautz, "and FASB is saying you've got two to three weeks to do it? People are going, 'Whoa, we have hundreds of locations not used to doing anything like this; how do we get it done?' Trying to do three months' worth of calculations in three weeks increases the likelihood of mistakes. Is it worth it?"

FedEx's Graf labels the idea "oxymoronic and counterintuitive," given the need to tie future projections as closely as possible to reality. "Here we are being pushed for years by the SEC to release results sooner," he says, "and now we are being asked to move the measurement date for pensions [closer] to the end of the year. I can tell you that it is extremely difficult to gather the information and data on 100,000 employees and make calculations for pension funding and the P&L in that kind of time frame."

FedEx currently has a pension-plan measurement date of February 28 and a fiscal year ending May 31, "giving us time to build a business plan that makes sense," says Graf. "We have ample time to know what the pension expense is as part of our overall pricing, salaries, and a strategic approach to business. If we have to build a business plan with a big 'X' in there and don't know the P&L and funding aspects after the fiscal year, our planning is rendered completely useless."

Milliman's Ehrhardt says the public outcry over the measurement-date issue may compel FASB to move this facet of reform to Phase Two. "There is a possibility of postponement," he says. Verlautz, however, believes that FASB will not back off. "What they may do is offer some computational shortcuts that may be acceptable — for example, allowing companies to estimate the inputs for their calculations, rather than requiring hard numbers," he says. "Politically that may be the bone they throw to preparers."

Although nothing is carved in stone, FASB is expected to issue a final proposal in September. Most observers say that despite the criticisms, the pressure to represent the funded positions of pension plans on the balance sheet is so strong that significant delays are unlikely. But so, too, is blanket acceptance. Most CFOs seem to agree with Graf, who says, "I'm not just the CFO here, I'm also an employee. It's my pension, too. But we need to find a balance between protecting employees and investing in the business in order to increase profitability. I'm concerned the proposed rules make that balance extremely difficult to strike."

Russ Banham is a contributing editor of CFO.

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