Pension ReportingPresentation to the

School of Business Faculty

Pete Bergevin

February 4, 2005

Pension Item 1

• Standard & Poor’s estimates that defined benefit pension plans in the S&P 500 companies were underfunded by $248 billion in mid-2004

• The amount of pension liabilities reported on the balance sheets of the S&P 500 companies was approximately how much?

• S&P estimates that about $51 billion (20%) appeared on corporate balance sheets.

Pension Item 2

• U.S. Steel contributed $75 million to its defined benefit pension plan in late 2003.

• How did U.S. Steel fund those contributions?

• U.S. Steel contributed appraised timber lands that it owned to the pension fund—not cash.

Pension Item 3

• US Airways reported that its defined benefit pension plans were 94% funded at the time it declared bankruptcy in 2003. The Pension Benefit Guarantee Corp. (PBGC), the federal insurer of private pension plans, assumed control of those distressed plans at that point.

• At what percentage did the PBGC measure US Airways’ pension plan funding?

• The PBGC determined that the plans were 33% funded.

Pension Item 4

WELCOME TO THE

ARCANE WORLD OF

PENSION REPORTING!

Background

• Pension plans constitute deferred compensation to employees.

• Two types of plans:– Defined contribution plans—employer contributes a

percentage of employee’s salary to a fund (e.g., TIAA-CREF, 401Ks)—no financial reporting problem.

– Defined benefit plans—employer guarantees a certain dollar amount of pension payments to vested employees—big financial reporting problem.

Focus on Defined Benefit Plans

• Defined benefit plans require many assumptions and projections.

• Prevalent in old-economy, heavily unionized industries (e.g., automotive manufacturing and full service airlines)

• Therefore, they are difficult to measure• In addition, generally accepted accounting

principles (GAAP) complicate pension reporting.

Research Strand

• Review of defined benefit pension plan GAAP with focus on revised standards.– Status - complete (article forthcoming in Today’s

CPA, May 2005)

• Analysis of compliance with GAAP – Status - underway

• Analysis of measurement issues– Status – underway– Focus of today’s discussion

Measurement Background

• Components of pension plan expenses

• Funding of pension expenses

• Factors affecting pension plan assets

• Items influencing pension plan liabilities

• Off-balance sheet disclosure

Research Question

• Are corporate and PBGC measures of pension plan funding significantly different?

• In other words, is the US Airways case the rule or the exception?

Project Status

• Item 1. Identify pension plans taken over by the PBGC– Status. Done

• Item 2. Classify distressed plans by industry– Status. Done– Notes. Classified by first two digits of NAICS

Project Status

• Item 3. Determine the percentage funded of each plan as measured by the PBGC– Status. Underway– Notes. Filed freedom of information act with the

PBGC

• Item 4. Determine the percentage funded of each plan as measured by the companies– Status. Not done– Notes. The PBGC may supply this information

Project Status

• Item 5. Analyze the data– Status. Not done

• Item 6. Write up the results and submit them – Status. Not done – Notes. Shooting for two articles—one

academic and one practitioner journal

Summary

• Pension reporting rules are complex

• New standards are designed to add transparency

• Compliance with new standards must be investigated

• Regardless of accounting standards, measurement precision may be lacking (the focus of this study)

Conclusion

• Thank you!

• Now let’s discuss privatizing social security!