FASB Begins Formal Cash Balance Review

January 22, 2004 (PLANSPONSOR.com) - The US Financial Accounting Standards Board (FASB) is undertaking a formal review of how cash balance defined benefit plans are valued - a project that may lead to changes for plan sponsors in the amount of retirement benefits they owe their departing workers.

The latest formal review comes after FASB attempted to require companies with cash balance plans to value the amount they owe in benefits using government bonds, rather than the high-grade corporate bonds other pensions use.  However, the rule makers put off that effort after employers and actuaries raised an outcry, saying the changes could hurt corporate earnings by expanding benefit obligations, according to a Dow Jones report.

“The goal is to put out final accounting guidance by the end of the 2004 addressing the measurement of liabilities for cash-balance pension plans,” Gerard O’Callaghan, a FASB practice fellow told Dow Jones. “But before we can get to the issue of measuring benefits, we need to refine the definition of cash-balance plans.”

First thing first for FASB, the rule making body will provide a definition of a cash balance plan, and once more clearly defined, FASB will then take on the larger accounting issues.   So far, FASB outlined three distinguishing characteristics these plans must have:

  • involve the use of employee accounts based on hypothetical benefits
  • payment of lump-sum benefits
  • use of interest credits.

Currently, accounting valuations do not speak specifically to cash balance plans, focusing instead on the broader issue of how to value defined benefit retirement plans as a whole, a nomenclature that includes cash balance plans in addition to traditional pension plans.    Yet, as cash balance plans have grown in popularity, so too has the controversy sounding their distributions.  

Balance Criticism

At the forefront of the controversy are concerns that cash balance plans do not pay older workers their fair share of benefits.   It was these worries that prompted the US Internal Revenue Service (IRS) to stop approving new cash-balance plans in 1999, even though companies have maintained and adopted cash balance arrangements nonetheless.

The cash balance controversy developed a new head of steam last year.   A major development was a court ruling this past summer against International Business Machines Corp. (IBM) in a class-action lawsuit claiming its cash-balance pension discriminated against older workers (See   Murphy’s Law: IBM Loses Cash Balance Ruling). The plaintiffs had claimed that the IBM plan violates the Employee Retirement Income Security Act (ERISA) because it is age discriminatory based on a conversion factor that increases in direct correlation to an employee’s age – causing older workers to receive a lower rate of benefit accrual and thus a smaller accrued benefit at age 65 than a younger employee who had the same service and salary as the older worker.

US District Judge G. Patrick Murphy in the US District Court of Southern Illinois agreed, ruling the computer giant violated age discrimination laws by amending its pension plan in a way that would make older employees accrue retirement benefits at a lower rate than younger workers. 

Plan sponsors with cash balance plans are also increasingly watching the movements of the US Treasury Department. Last year, the Treasury Department issuedregulations intended to resolve the age discrimination questions. But the proposal was roundly criticized by pension rights advocates and companies alike.   Then in September, the US House of Representatives passed an amendment prohibiting the Treasury Department from getting involved in efforts to overturn the IBM decision (See    Congressional Cash Balance Opponents Tout “Win”).