The 78 companies in the Fortune 100 with defined benefit plans would have had to report combined pension and other post-retirement liabilities of $331 billion on their balance sheets at year-end 2004, instead of the $62 billion total they reported, if new accounting rules expected from FASB were in place, according to a Towers Perrin analysis released today.
FASB's expected changes would have reduced the companies' shareholders' equity by a combined $180 billion, or 9.3%, after tax adjustments, assuming a 35% tax rate, the analysis found. Towers Perrin's analysis also showed that each additional 10% return (or loss) on assets as of year-end 2004 would have changed shareholders' equity by a combined $56 billion, or 3%; and a 10% change in retirement plan obligations as of year-end 2004 would have changed shareholders' equity by a total of $77 billion, or 4%.
Bill Gulliver, principal and chief actuary at Towers Perrin's HR Services, said the impact on liabilities is larger because "in aggregate the pension assets of the companies are smaller than the obligations; and the FASB rules apply to retired medical, which in most cases are not funded at all."
FASB is expected to release an exposure draft for public comment of Phase I of the project, which focuses on the balance sheet, in March with an expected effective date of Dec. 15, 2006, according to Mr. Gulliver and FASB. In Phase II, FASB is expected to move to a mark-to-market accounting for retirement plans, requiring a more rapid or immediate recognition of financial impact of the changes in value of plan assets and liabilities from year to year on income statements rather than the amortization or smoothing now practiced, he added. FASB has not issued a projected timetable for Phase II.
"It will be interesting to see what effect the (changes in) rules will have on stock prices" of the companies, Mr. Gulliver said. "Now the information is fully disclosed (in notes to financial statements) so analysts and investors are already taking this information into account. So it may have no impact on stock price because the information is already available."
In aggregate, the 78 companies' plans studied were 87% funded as of Dec. 31, 2004, Mr. Gulliver said. "We expect they will be slightly better funded at end of 2005."
