Economic Fallout Casts Spotlight on Pension Accounting

Auditors of companies with large defined benefit plans would be wise to pay extra close attention to their clients' pension accounting this year, as investors and analysts cast a wary eye on corporate pension woes.

Reasons for concern:

  • Effects on profits. A report issued by Morgan Stanley this summer points out that net pension surpluses among S&P 500 companies were $235 billion in 2000, but tumbled 98% to only $4 billion in 2001. Some companies are likely to have deficits in 2002, resulting in lower operating profits in 2002 or 2003.

  • Going concern risks. A clear danger for companies with underfunded pensions is that they could end up in technical defaults on their loans and bonds, thereby jeopardizing their ability to continue as going concerns.

  • Criticism of accounting standards. UBS Warburg, the Swiss banking giant, points out that U.S. accounting techniques "delay and only partially recognize changes in asset market values." They also smooth or amortize these changes over a long period leading to "balance sheet values of net pension liabilities or assets that are often completely meaningless." UBS notes that 118 of the 355 S&P companies with defined benefit pension plans show a surplus on their balance sheets when the fund is really in deficit. ("Accounting tricks can't hide the big squeeze on pensions," Financial Times, October 2, 2002.)

David Blitzer, chairman of Standard & Poor's index committee predicts pensions will replace stock options as the big corporate accounting issue next year. The full impact may not be felt for two to four years because companies are not required to contribute funds until pension assets fall below 85% of liabilities. But Nancy Webman, editor of Pensions and Investments, is hoping companies will disclose more details to investors. "With all the accounting scandals and all that," she said, "It's possible some companies will be more upfront."

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