Human Capital & Careers

Pension Woes Worrying CFOs, Survey Finds

More than half of respondents said they'll have to cover a pension liability this year.
Jennifer CaplanMay 13, 2003

Pension shortfalls, pension regulations, and pension accounting are high on CFOs’ lists of concerns these days, according to a new study by global outsourcing and consulting firm Hewitt Associates,

More than half of the CFOs and treasurers at the 174 mid-sized to large companies in the survey said they will need to fund a pension liability this year. Only 8 percent are considering terminating their plans because of liabilities, however.

“One of the reasons for current concern is that contributions are driven by the 30-year Treasury rate, which is no longer issued,” said Mike Johnston, Hewitt’s North American practice leader for retirement and financial management.

As a result, the rate has become artificially low, causing an excessive assessment of pension liabilities and overstating the need for contributions. Congressional action is required to change the discount rate. Once the rate is adjusted, Johnston believes, pension liabilities should be more manageable.

Interestingly, Hewitt’s study found that just 4 percent of executives have canceled programs to convert their traditional company plans to cash-balance plans. Some observers thought the threat of legislative and regulatory challenges might have many companies backing off such plans.

The decision whether to convert has been a hot topic of late. The Treasury Department recently introduced a proposal that would allow companies to convert their traditional plans to cash-balance plans. But the proposal touched off a whole lot of controversy.

Shortly after officials at the Treasury Department announced their intention, Reps. George Miller (D-Calif.), Bernie Sanders (I-Vt.), and Rahm Emanual (D-Ill.) introduced a bill in the House of Representatives requiring Treasury to nix the proposal. The House bill also gives managers the option to offer workers age 40 or older and those with at least 10 years of service at a company the opportunity to decide whether they want to stay in a defined-benefits program or switch to a cash-balance plan.

Hewitt’s research certainly highlights corporate concerns about pension funding. More than 60 percent of the respondents believe that pension cost volatility is either a major problem or a serious concern. Although Hewitt is advising its clients to reassess their asset mix in light of recent market volatility, more than two-thirds of respondents said they aren’t contemplating changes in their pension investment allocations despite market conditions.

“While there is some suggestion that companies will increase their allocation to fixed-income securities, we’re not expecting a significant shift from equities to bonds when stock prices are low and bonds are high,” noted Johnston. “In the long run, the return on equities is still likely to be higher.”

If FAS 87—which governs how pension income and expense are accounted for and disclosed in a company’s financial statements—is superseded or revised, nearly 63 percent of the finance executives surveyed believe that pension expenses should reflect investment experience on a smoothed basis.

Nearly half think that the balance sheet should reflect the funded status of pensions on a direct-market-value basis showing both over- and underfunded positions. Thirty-seven percent said the balance sheet should reflect some amortizations and deferrals.