KAI RYSSDAL: Inflation over time of course is the big worry for retirees. Their dollar today not being worth as much when they need it later on. A lot of companies are about to start feeling poorer, too. Not inflation. Regulation’s the culprit. Until now, businesses have been able to bury their expected pension obligations down in the footnotes of their financial statements.
Creative accounting like that let companies like General Motors, with a huge retired workforce, look more profitable than they actually might be. Maybe profitable’s not the right word to use with GM, but you get my point. Marketplace’s Amy Scott reports on the change.
AMY SCOTT: From now on companies will have to list their future pension and retiree medical costs front and center on the balance sheet.
Let’s say Corporation X has $10 billion in pension liabilities but only $9 billion in assets? That billion-dollar gap will now come out of the bottom line. David Zion is an accounting analyst with Credit Suisse. He looked at how the rule change would affect the companies on the S&P 500 stock index.
DAVID ZION: At the end of 2005, their pension plans were $145 billion underfunded. But on their balance sheets these same companies had a $121 billion asset representing the pension plans. So I describe that as a $266 billion disconnect.
Opponents of the new rule say investors and stock analysts already had that information in financial statement footnotes. Lynne Dudley is with the American Benefits Council. The group represents corporations that offer employee pensions.
LYNNE DUDLEY: I think most analysts would tell you right now they already know it’s on the income statement. They look on the income statement for the amount. I think moving it to the balance sheet is not necessarily gonna make people more aware.
Dudley says what the move might do is inspire more companies to close their pensions to new employees to freeze those liabilities.
More and more companies are already doing so. The consulting firm Watson Wyatt says last year 113 companies had frozen or planned to freeze their pensions. That’s nearly twice as many as the year before.
In New York, I’m Amy Scott for Marketplace.