FOR IMMEDIATE RELEASE
Towers Perrin Analysis of Expected
Changes in Pension Accounting Finds Dramatic Impact Likely on Companies’
Financial Statements
Changes Could Erase $180 Billion in
Shareholders’ Equity for the Fortune 100
STAMFORD, CT., January 30, 2006 -- Based on an analysis of changes
in the accounting rules for pensions and other postretirement benefits
expected to be proposed by the Financial Accounting Standards Board (FASB)
in March, Towers Perrin found that the Fortune 100 companies that
sponsor defined benefit plans would have been required to recognize an
additional liability of $331 billion on their balance sheets at year-end
2004, instead of the $62 billion that was on the balance sheet at that
time.
After tax adjustments (assuming a 35% tax rate), the FASB’s planned
changes would have reduced shareholders’ equity by $180 billion for the 78
Fortune 100 companies that sponsor defined benefit plans, representing a
9.3% reduction in their total shareholders' equity.
Many companies that sponsor defined benefit retirement plans have just
begun to assess the impact of the two-phase project announced by the FASB
last November. Phase I of the project, which is expected to affect
most companies' year-end 2006 financial reporting, focuses on the balance
sheet. Phase II, which will take longer to complete, involves a
comprehensive reexamination of all aspects of accounting for pensions and
other postretirement benefits. Among the most significant changes
expected in Phase II is a move toward mark-to-market accounting for
retirement plans, with a requirement that a comprehensive income statement
more rapidly report the effects of changes in the fair value of plan
assets and liabilities from year to year.
The Towers Perrin study not only measured the impact of the changes in
balance sheet rules expected to take effect at year-end 2006, it also
analyzed how the planned accounting changes might introduce greater
volatility in the balance sheet and income statements of retirement plan
sponsors. The analysis showed that for the 78 Fortune 100 companies
studied:
Each additional 10% return (or loss) on assets as of year-end 2004
would have changed shareholders’ equity by $56 billion for these
companies, representing nearly a 3% change in shareholders' equity for the
group.
A 10% change in retirement plan obligations as of year-end 2004 (as
might occur if discount rates were changed by a half to three-quarters of
a percent) would have changed shareholders' equity for these 78 companies
by a total of $77 billion, representing 4% of the total shareholders’
equity of the group.
An additional 10% return (or loss) on assets, if recognized on the
income statement, would have changed 2004 pretax income by 19% for the
group.
A 10% change in retirement plan obligations, if recognized on the
income statement, would have changed 2004 pretax income by 26% for the
group.
The Towers Perrin analysis found that the impact of the FASB's expected
changes in retirement plan accounting will vary widely from company to
company. For some companies, the impact will be dramatic. For
example, for one out of 10 companies studied, recognizing a 10% increase
in retirement plan obligations as cost would have turned 2004 pretax
income into a loss. Similarly, recognizing a 10% reduction in these
obligations on the income statement would have more than doubled the
companies’ 2004 pretax income.
Towers Perrin also noted that the FASB will likely give serious
consideration to reporting retirement benefit cost by functional component
(e.g., operating, financing, investing activities). If the effects of
investment return and interest-rate changes are characterized as
nonoperating costs, the new rules could reduce the volatility in operating
costs associated with retirement plans despite greater volatility in total
costs.
"As our analysis shows, these accounting changes are certain to have a
dramatic impact on many companies’ financial statements in the years
ahead. Phase I is likely to result in significant reductions in
shareholders’ equity and Phase II seems certain to introduce added
earnings volatility," said Bill Gulliver, principal and Chief Actuary for
Towers Perrin’s HR Services business. "However, it is uncertain
exactly how the market will react because most of the information expected
to find its way onto the balance sheet is already disclosed in financial
statement footnotes. Consequently, many analysts are already using
that information to adjust the balance sheet today."
About Towers Perrin
Towers Perrin is a global professional services firm that helps
organizations improve their performance through effective people, risk and
financial management. Through its HR Services business, Towers Perrin
provides global human resource consulting that helps organizations
effectively manage their investment in people. Areas of focus include
employee benefits, compensation, communication, change management,
employee research and the delivery of HR Services. The firm’s other
businesses are Reinsurance, which provides reinsurance intermediary
services, and Tillinghast, which provides management and actuarial
consulting to the financial services industry. Together, these
businesses have offices and business partner locations in 25
countries. More information about Towers Perrin HR Services is
available at www.towersperrin.com/hrservices.