Capital Markets

Moody’s Underwhelmed by Pension Rule

Although the application of FAS 158 will increase total liabilities significantly, the added weight on balance sheets should not affect a company's...
Stephen TaubOctober 4, 2006

Much ado about nothing. That is how Moody’s Investors Services greeted the final pension accounting standard issued last week by the Financial Accounting Standard Board. The standard, FAS No. 158, requires companies to record the funded status of retirement plans on their balance sheets.

The debt rating company asserted in a published analysis that FASB’s standard does not differ significantly from its previously published exposure draft in terms of credit implications. In fact, Moody’s stated that although the new standard “will significantly increase” total liabilities and reduce shareholders’ equity for many non-financial corporations, especially those with large legacy workforces, it is unlikely to affect debt ratings, largely because the rating agency has already been adjusting balance sheets for pension liabilities.

In August, Moody’s revised how it will evaluate the under-funding of multi-employer defined-benefit pension plans and the liabilities it creates for some debt issuers. The debt rater explained that it will consider a company’s share of plan under-funding to represent a long-term, debt-like liability and will adjust its interpretation of the company’s financial statements accordingly. Moody’s said 62 companies that it rates contribute to multi-employer plans.

Multi-employer plans, popular in unionized industries, allow certain employees to keep their pension plans as they switch employers. Under current accounting rules, companies treat their contributions as an annual expense and do not have to disclose projections of their long-term obligations, which can fluctuate significantly. Companies that sponsor significantly under-funded plans are often in the construction, entertainment/printing, food/supermarkets, hotels/casinos, and transportation industries, according to Moody’s.

The rating agency’s own study of 133 plans found estimated average funding of 83 percent, with total under-funding across the industries studied at about $49 billion. Some very large plans were only about half funded, the Moody’s study said.