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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
Effective reform of the pension system will require changes in pension accounting standards, in addition to the legislative changes currently under discussion in Congress, according to Pension Benefit Guaranty Corporation (PBGC) Executive Director Bradley D. Belt.
In a recent speech to the American Institute of Certified Public Accountants (AICPA), Belt noted that the PBGC has had to take over more than 3,600 plans since its inception in 1974. Consequently, it has almost $80 billion in present-valued liabilities, and an additional $108 billion exposure to "reasonably possible" claims from underfunded plans. In Belt's view, these liabilities are the result of "broken" funding rules. If full funding of pensions was truly required, he stated, companies would not have been able to terminate plans with fewer than half the assets necessary to cover promised benefits, or, as was the case with bankrupt United Airlines, with a $10 billion funding gap. "...(C)urrent funding rules allow, even encourage, companies to chronically under-fund their pension plans, effectively borrowing on a no-cost basis from their employees; ...they encourage companies to shift costs to workers and retirees, to other responsible plan sponsors, and possibly to taxpayers."
Pension reform will require the strengthening of plan funding rules, proper pricing of premiums and greater system transparency. These issues are addressed by Administration proposals and recently passed Senate and House bills currently being discussed by Congress. But reform of pension accounting standards is also required, Belt asserted.
The current pension system is critically short of transparency, Belt warned, leaving investors, beneficiaries and regulators unable to make informed judgments about the health of pension plans. He placed some of the blame for current pension underfunding on existing pension accounting standards. GAAP (Generally Accepted Accounting Principles) "...seem(s) designed to obfuscate reality when it comes to pensions," Belt asserted, making it "almost impossible to gain a real understanding of a pension plan's net position on an accrual, or present valued, basis."
During the 1980s and 1990s, Belt stated, the true financial state of pension plans was temporarily obscured by strong investment returns, and by pension accounting standards that permitted pension plans to appear to be a source of net income for the plan sponsors rather than a cost. However, when the stock market "bubble" burst in the beginning of this decade, and interest rates dropped, "investors were shocked to discover that pension plans could result in a charge to corporate income." The true financial position of plans would not have come as a surprise, Belt contended, had investors been previously able to see a more accurate picture of plans' net position on an accrual basis.
Criticisms of pension accounting have also come from other quarters, Belt noted. The Securities and Exchange Commission (SEC) reported that pension plan accounting deviated from the accounting required for other businesses and compensation, even when the economics were similar. Other commentators, such as former SEC chairman Arthur Leavitt, have called pension accounting "a shell game," misleading investors and allowing sponsors to make promises to participants they cannot keep, Belt asserted.
Belt commended the Financial Accounting Standards Board (FASB) for its acknowledgment of the problem and the commencement of its recent efforts to reconsider pension accounting standards (see CCH Pension Plan Guide Newsletter No. 1607, November 21, 2005). He noted, however, that some plan sponsors and actuaries are resisting changes in pension accounting standards.
Some sponsors argue that if they are not permitted to "smooth" assets and liabilities, financial statements and contribution requirements would become too volatile and unpredictable, impeding effective planning. "Smoothing," Belt argued, "is a polite way of characterizing the masking of the underlying risks and volatility of pensions." Changes in accounting standards, as well as proposed changes in ERISA funding rules, would not introduce risk and volatility, Belt maintained; they would merely expose what risk and volatility is already there.
Another argument given by those opposed to changes in pension accounting standards, Belt said, was that pensions, as a long-term obligation, were entitled to high rate of return assumptions, and less than full funding. Belt countered that pension obligations, similar to wages, health, vacation and other benefit obligations, are created when benefits are earned, notwithstanding the fact that employees must wait until a future date to receive them. As such, in economic terms, accrued pension benefits represent an obligation for services rendered in the past. Thus accounting for these obligations should be no different than for other operating expenses.
For more information on this and related topics, consult the CCH Pension Plan Guide.
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