WASHINGTON -- Some lawmakers are planning to ask the SEC to crack down on companies that might have misled investors about the extent to which pension income boosted their corporate earnings.
Rep. Bernie Sanders, I-Vt., and other congressmen are expected to ask SEC Chairman Arthur Levitt to investigate why some companies did not disclose pension earnings in the bodies of their annual financial statements.
Mr. Sanders, a fierce foe of cash balance plans, is concerned many companies might have raised their corporate earnings by cutting benefits -- and therefore cutting pension costs -- when they converted their traditional pension plans to cash balance plans.
Mr. Sanders hopes many of the 59 other lawmakers who raised questions about the validity of cash balance plan conversions in comments to the Treasury Department earlier this year will co-sign a letter to Mr. Levitt.
The Securities and Exchange Commission, in turn, could ask companies to redo their shareholder reports, or could dun them for violating a directive.
"It depends on the situation, of course, but the commission could bring action against companies that don't follow the rules," an SEC spokesman commented.
Accounting rules permit companies to take their pension incomes into account when calculating corporate earnings. Until recently, no discussion beyond a footnote in the annual financial statements was needed. Last December, however, SEC Chief Accountant Lynn Turner reminded the accounting profession that companies with sizable pension income also are required to give that information to investors -- in the management's discussion and analysis of financial conditions and results of operations portion of the annual report.
Mr. Turner was concerned some companies might be giving investors an incomplete picture of their financial health (Pensions & Investments, Jan. 24).
A review of many of the largest companies' 1999 annual reports shows some earned an astonishing amount of their income from their pension funds. Some buried that information in the footnotes of their financial statements.
Eaton Corp., for example, reported $13 million in pension income in 1999, or 1.8% of its operating income. The firm reported the information in the financial review section of its annual financial statement, but did not discuss it in the MD&A, or management's discussion and analysis, section.
But because the company attributed the income to the elimination of pension liabilities for businesses sold last year, and that was described in the footnotes of the company's 1999 annual report, "We did not see the need to go any further," said Jill Michalski, a senior financial reporting analyst at Eaton. In any case, Ms. Michalski said, 1.8% of the company's operating income "is clearly immaterial."
The Kmart Corp. reported $68 million in pension income, or 5.2% of its $1.3 billion operating income last year. The company did not discuss its pension fund's contribution to its bottom line in the MD&A section of its annual report. Kmart had frozen its defined benefit pension plans at the end of January 1996, so employees no longer earn any new benefits. Mary Lorencz, a company spokeswoman, said the information was "fully disclosed in the footnotes in the annual report."
Another company that failed to heed the SEC directive is IBM Corp., which reported $638 million in pension income at the end of 1999, or 5.3% of its operating income.
IBM has been in the spotlight for not disclosing the contribution of its pension fund to its bottom line.
James M. Leas, an IBM employee and shareholder, has written several letters to IBM Chairman and Chief Executive Louis V. Gerstner Jr. asking the company to explain why it did not disclose that information upfront to investors in its 1999 annual report.
Mr. Leas has asked the SEC to investigate and to force IBM to hold a fresh vote on his shareholder proposal, which asked the company to offer employees the choice of staying in the traditional pension plan and receiving full retiree health-care benefits. The proposal received 28% of the 755.4 million votes cast.
"That vote was marred by concealment of material facts about IBM's report of profit and profit growth," Mr. Leas said in his July 18 letter to Mr. Levitt, Mr. Turner and other SEC officials.
Carol Makovich, an IBM spokeswoman, said "We feel our disclosure is in full compliance and we did not feel the changes year to year warranted mention in the MD&A."
Companies that have earned substantial portions of their corporate incomes from their pension funds "need to stop misleading their investors and start doing what the SEC told them to do," said Warren Gunnels, Mr. Sanders' legislative aide, who recently met with the SEC's Mr. Turner.
"The most important thing is to protect the pensions of all American workers and be forthcoming with investors and stockholders," Mr. Gunnels said.
In his meeting with Mr. Turner, Mr. Gunnels said he asked if congressional concern would help highlight the issue and prompt the SEC to look into the matter.
Mr. Turner, who shares Mr. Sanders' concern about companies' giving investors a full accounting of their sources of income, apparently agreed that it would be a good idea for lawmakers to bring it to the attention of the SEC.
In a May 16 memo to Mr. Levitt, Mr. Turner wrote: "In this regard (that the SEC must continually strive to provide investors with `representationally faithful and transparent information') we share Rep. Sanders' concern and will continue to monitor registrant filings for compliance."
Mr. Sanders had written to Mr. Levitt on Feb. 24, asking the regulator to change the accounting rules, forcing companies to treat pension income as unsustainable investment income.
But because the bonuses many chief executive officers receive are tied to the performance of their companies' operations, the SEC persuaded Mr. Sanders that such a change could prompt companies to shut down their pension plans.
Instead, in December the SEC put companies on notice that they need to make it clear to investors if their pension funds are helping prop up their bottom line.