Rule could shed light on pension assets

So far, corporate pensions appear to have escaped the credit market storm that has punished commercial and investment banks and insurers. But don't be fooled. Plenty of toxic mortgage-related debt probably is there, just buried from investors' view.

Blame current accounting rules that require companies to disclose only the basics about their pension plans. That allows them to release the broadest of generalizations about their stock, debt and other investments, and whether those assets are enough to cover future pension obligations, which makes for a dark corner of corporate financial statements.

The good news is that some much-needed sunlight soon may arrive. The Financial Accounting Standards Board is considering a proposal that would force companies to provide more detail on how they allocate and value their pension assets.

Should that standard be adopted, it would beef up the disclosures for the nation's defined-benefit plans, which pay workers a company-funded monthly check when they retire. That differs from defined-contribution plans, such as 401(k) plans, which are accounts to which employees contribute and are invested according to employees' directions.

How corporate pension plans fare certainly matters, since they are intended to cover 44 million American workers and retirees.

Just look at what happened earlier this decade, when the dot-com bust caused many plans to become severely underfunded, meaning what they owed to retirees exceeded assets by at least 10 percent. That deterioration in the plans' health left many companies with surging pension costs.

Those expenses became another reason, along with the ballooning costs of running defined-benefit plans, that many companies have phased out the programs for new employees.

Now there is another financial crisis to worry about that. The turbulence in stock and bond markets could roil pension assets, but that most likely won't show up in the annual pension report cards that companies will give as part of their annual financial reports to the Securities and Exchange Commission.

Many plans saw their pension assets rise for 2007 because record-setting market gains early in the year offset the late-year losses. For instance, the Standard & Poor's 500 stock index tumbled 6 percent from October through the end of December, but still finished 3.5 percent higher for the year.

The defined-benefit plans of the 372 companies in the Standard & Poor's 500 stock index that offer them are expected to be 97 percent funded at the end of 2007, unchanged from the previous year and sharply higher than the 81 percent level in 2002, according to Credit Suisse accounting analyst David Zion.

In addition, companies don't have to disclose their exposure to certain assets, making it almost impossible for investors to understand a plan's risk. Companies just categorize investments in basic buckets such as equity, fixed-income, real estate and "other," which often refers to the fast-growing area of alternative investments such as hedge funds or private equity funds.

"For most companies, every one of those categories means different things," Zion said. "With the recent turbulence in asset values, investors want more detail about the types of assets that companies hold, including assets in the pension plan."

If the FASB gets its way, investors soon will get better insight. The U.S. accounting rulemaker decided Feb. 14 to move forward with a potential rule change that would improve pension disclosures.

At minimum, companies would have to disclose the amount of assets allocated to stocks, government bonds, corporate bonds, mortgage-backed securities, derivatives and real estate. Additional categories would be provided for concentrations of risk, such as large investments in a single country or type of securities, said Philip Hood, lead manager for the FASB on this proposal.

Companies also would have to apply new fair-value disclosures to their pension assets, just as they do to other balance sheet items. That means companies would have to give more information on how they value their plan assets.

The FASB wants this rule in place for companies with fiscal years ending after Dec. 15. It will seek public comment on the changes starting next month, and then will review the proposal again.

Reach Rachel Beck at rbeck@ap.org.

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