FASB Publishes Final Standards for Pensions and OPEB

Even if the changes are meant to make companies better hold to their obligations, the accounting overhaul is a near “nightmare for plan sponsors across the board” for large and small plans, Jon Waite, the lead actuary for SEI’s Global Institutional Group, told PLANSPONSOR.com in an interview.

Waite argues that the main issue at hand is how plan sponsors are going to reconcile the funding rules set by the Pension Protection Act (PPA), which uses accrued benefits to calculate funding, and the FASB regulations, which calls for the calculation of pension liabilities and assets by using projected benefit obligations (PBO) (See  What’s Inside the Pension Protection Act ).

In issuing its final rule on Friday, FASB did not waiver in its requirement that these obligations take into account salary increases –  a figure that would further increase the amount of the liability (See FASB Holds Firm on PBO, APBO).  The independent body made the decision in the face of fierce objections from business leaders who fear tacking on these obligations to the statements will hurt their financial positions (See FASB Racks Up 235 Letters on Pension Accounting Proposal ).

Waite expects the complexity for plan sponsors to only escalate amid funding obligations put into motion by the PPA in August and the first phase of the FASB accounting changes.

As with the basic tenants of the FASB proposal made in March, the attitude of the American Benefits Council (ABC) on the accounting watchdog’s proposal has not changed with the release of the final version, according to Lynn Dudley, vice president, retirement policy, ABC. “This rule is on the heels of the Pension Protection Act,” she argues. “FASB should have put off passing the first phase until they were certain the PBO should be used to calculate obligations.”

According to Dudley, FASB’s release of the rule was a premature one that came after the admission that it was not sure whether projected benefit obligations should be used in the calculation of a company’s assets or liabilities.

Dudley does not expect dramatic ramifications in terms of how investors view the equity of a company, as “analysts can figure out how to separate a company’s financial health from its future obligations.” However, she is concerned that the rules could propel companies to freeze their defined benefit plans, because “they simply don’t want to deal with the volatility” that changing standards brings.

Previous accounting standards allowed employers to delay recognition of certain changes in plan assets and obligations that affected the costs of providing such benefits. Employers now will have to recognize changes in the funded status of retirement and post-employment benefits in the year in which the changes occur.

FASB’s Statement No. 158 is here .