The decision to freeze corporate pension plans could be affected by FASB pension accounting-rule proposals and the possible enactment of ERISA funding legislation, including ending cash balance plan regulatory hurdles, according to a Merrill Lynch report issued today.
"Companies considering a plan freeze would be wise to wait and see what the new pension landscape looks like," Gordon J. Latter, pension and endowment strategist at Merrill Lynch, said in the report.
"ERISA funding legislation could be enacted by the end of July," the report said. "It is very likely that airlines will be allowed to amortize their deficits over 20 years (vs. seven years for other companies). The quid pro quo for this relief is that airlines will be forced to freeze their plans."
But "if the House and Senate conferees can resolve the age discrimination issues facing cash balance plans, new types of DB designs could emerge and reverse the trend to freeze or terminate these types of plans," he noted.
Also, as the Financial Accounting Standards Board "rewrites the pension accounting rules, the pension system is clearly at an inflection point," the report said. "A company considering a plan freeze should closely monitor the potential balance sheet and income statement impact of accounting proposals, as it could alter the decision to freeze a plan."
FASB's use of accumulated benefit obligation to measure pension liabilities, and thus the net funded status of plans, would be viewed by many plan sponsors as a better measure of the economic liability than projected benefit obligations, which includes wage increase assumptions, the report said. "Many believe that a measurement based on the PBO … artificially increases the balance sheet liability and is one more reason to freeze the plans. However, if the ABO camp wins the day, this reason no longer exists," the report added.
FASB rules currently use PBO to measure liabilities, Mr. Latter said in an interview.
