YAHOO FINANCE – Dec 7, 2005 Investor's Business Daily FASB Wants To Draw Attention To Firms' Weak Pension Funding Christina Wise The nation's accounting rule makers won't force old-line businesses to make fundamental changes to their pensions' bookkeeping right away. But they do intend to shine a bright light on underfunded plans that many firms keep buried deep within financial footnotes. The Financial Accounting Standard Board's proposals, announced last month, would apply to companies with defined benefit pension plans, which promise workers specific payments and benefits during their retirement. FASB wants to make pension information "more useful and transparent for investors, creditors, employees and other users." The first phase would force firms to list the funded or underfunded status -- projected pension obligation minus the value of the pension assets -- on their balance sheets. Today that's buried in firms' footnotes to financial statements. And with good reason: Some pensions are significantly underfunded. FASB hopes to have these rules finalized by the end of 2006. This first phase would not force companies to fully fund pensions or affect earnings per share. But Credit Suisse First Boston estimates this switch could shrink shareholder equity of S&P 500 firms by $255 billion, or 7%. The investment bank says several firms could see shareholder equity decline by more than 25%. These include Goodyear Tire & Rubber (NYSE:GT - News), UST Inc. (NYSE:UST - News), General Motors (NYSE:GM - News), Ford (NYSE:F - News), Hercules (NYSE:HPC - News) and Deere (NYSE:DE - News). The second phase will be far more contentious and might take several years. FASB plans to consider changes to firms' pension accounting. That could include a hard look at "smoothing," which lets firms remove volatility in pension returns -- and corporate earnings. FASB also might weigh accounting for retiree health care plans. David Zion, a research analyst with CSFB, says greater transparency is a needed first step. "The current accounting results in financial statements that are misleading," Zion said. "The underlying economics of the pensions is in the footnotes, and on the face of the financial statements is something completely different." S&P 500 companies reported $99 billion in pension assets on their balance sheets at the end of last year. In reality, they were $165 billion underfunded, Zion notes. "That's a $264 billion disconnect," he said. Gordon Latter, pension strategist with Merrill Lynch, said it boils down to transparency. "Having disclosure doesn't mean you have a transparent system," Latter said. Bumping pension items up to the balance sheet is a step toward making it transparent, he said. Will Shame Spur Change? More prominent reporting of the health of their pension funds may spur firms to alter how they're run. "The big thought process is that ... they're going to be forced to more appropriately address their funding volatility," Latter said. "Which means they're going to have to have a better match of assets and liabilities." That might push firms to shift pension investments from stocks to more stable, longer-term bonds. CSFB's Zion notes pension plans are big players in the stock market. Private defined benefit plans had roughly equal chunks of their assets in equities and fixed income in 1990, according to CSFB calculations of Federal Reserve data. By the end of the decade, due in large part to the booming bull market, 58% of private sector pension plan assets were in equities and 25% in fixed income. Even after the bear market, the appetite for stocks grew. At the end of last year, S&P 500 companies had 62% of their $1.3 trillion in defined-benefit plan assets in equities vs. 29% in fixed income. During the boom years, returns were so good that some companies contributed little or nothing to their pension plans. This was buried in financial footnotes. "They were on funding holidays for a while and the funding volatility didn't affect their results," Zion said. "It made the plans appear healthier and less volatile than they were, and our thinking is you change the rules, you change the behavior." But many firms are just winding down their pensions. Verizon (NYSE:VZ - News) said Tuesday that managers hired after Jan. 1 won't be eligible for a pension. The telecom giant will freeze current managers' pension credits as of June 30, 2006. Congress is working on legislation that would raise premiums paid by firms with defined benefit plans to the Pension Benefit Guarantee Corp., the government agency that insures private pensions. Because many airline, steel and auto parts firms have defaulted on their pensions in recent years, the PBGC has a $25.7 billion debt.