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On April 1, 2006, the financial news trumpeted that the FASB was taking, as Andrei Postelnicu put it in the Financial Times, ’significant steps in reforming the way companies report pension liabilities.’

Accounting rules effect real people

The Financial Times article (FT.com, April 1, 2006) goes on to say,

‘The move aims to increase the transparency of financing for certain pension plans and replace a system in which the balance sheet “almost always” fails to reveal the true state of those benefit plans, according to the Financial Accounting Standards Board.’

However, this change in accounting standards only represents a further slow tightening of the screws regarding the way pension liabilities are reported — a step in a long, excruciating journey that has been underway for decades.

Deliberate diddling and delay

According to this summary on the FASB website:

FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, paragraph 2, indicates that “the Board intends future change [in practice] to occur in the gradual, evolutionary way that has characterized past change.”

The GASB is taking similar, but not identical steps in requiring more truthful accounting of public pension funds.

When accounting is reality

Since “accounting is reality” for many in the capital market, and judging from now long-established trends regarding defined-benefit pension plans, the following capital flows may be expected:

• Accelerated decline of private defined-benefit plans: The requirement to put unfunded pension liabilities on the balance sheet will speed up the process of closing-down defined-benefit plans. As I mentioned in an earlier article, ‘Over the decade 1995-2004, $541.5 billion was withdrawn from private ‘defined benefits’ pension plans, while only $253.8 billion went into private ‘defined contribution’ pension plans. On balance, private pension plans suffered a net withdrawal of $287.7 billion over the decade.’ This trend should continue.
• Negative impact on old, unionized companies: Although the pension burdens of industrial America that caved-in to exorbitant demands of powerful labor unions in the mid-20th century are well-known, putting these numbers on the balance sheet will further weaken bond ratings and encourage companies to seek bankruptcy as a solution to their problems.
• Intensifying of stock buyback programs: Since under-funding of pension plans will be reflected on balance sheets of corporate pension providers, pension portfolio managers will be under intense pressure to use the stock proxies they hold to demand larger and more effective stock buyback programs from corporate management. See “Why Defined-Benefit Pension Managers Support Stock Buybacks“. This will be bad for long-term investors in equities.
• Increased state and local taxes: State and Local Government liabilities with pension funds (Q3 2005) totaled US$ 2.7 trillion, and this is probably understated. Full disclosure of public pension fund liabilities by municipality is unlikely to improve bond ratings. Given the entrenched status of government employee unions, the likely result will be higher state and local taxes. See the article: “Consequences: Rising Home Values, Land Costs, and Pension Benefits.”

None of this suggests a discontinuity with long-standing trends in the flow of funds.

Furthermore, there are many more ‘reforms’ waiting to enter center stage in the slowly evolving pension fund accounting drama.