FASB Formalizes Cash Balance Review

The nation’s accounting rulemaking body took on the review in part due to the relatively murkiness of what defines a cash balance plan.  “We continue to use the phrase ‘cash balance’ as if we know exactly what we mean, but we don’t,” board member Katherine Schipper told Dow Jones. “The first step would be to define the nature of guidance that would apply.”

The 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 rulemakers put off that effort after employers and actuaries raised an outcry, saying the changes could hurt corporate earnings by expanding benefit obligations.

Under current FASB pension rules, no distinction is drawn on how companies should value cash-balance obligations versus other defined benefit plans.   Rather, the regulations lump the entire defined benefit universe into the same valuations.

Cash Balance Microscope

The FASB scrutiny only highlights a huge amount of controversy surrounding cash balance plans recently, that puts a giant question mark about how these plans will be run in the future.  Recently, a federal judge ruled in Cooper v. IBM Personal Pension Plan that IBM’s cash balance pension plan violates the provisions of the Employee Retirement Income Security Act (ERISA) prohibiting age discrimination in retirement programs (See  Murphy’s Law: IBM Loses Cash Balance Ruling ).

This decision set off an avalanche of criticism on both sides of the aisle that stretched to the halls of Congress.  Last week, the US House of Representatives okayed a legislative amendment that would block any new government rules about controversial cash balance plans that were contrary to the aforementioned federal court ruling (See Emotion Charged Cash Balance Plan Amendment Passes US House ). 

“The court found that IBM knew that older workers would lose up to 47% of their pensions under the cash balance conversion.  This ruling was a welcome outcome for the 130,000 IBM employees who were represented in the case – and for the millions of other Americans whose employers have already converted to one of these age discriminatory plans or might in the future,” wrote Representative Bernie Sanders (I-Vermont) a co-sponsor of the bill.  “(But) despite this court ruling, it appears that the US Treasury Department is still moving ahead with proposed regulations that would give the green light to the very cash balance pension plans that the court ruled are illegal. This is wrong.  That is why our amendment would specifically prohibit the IRS from issuing regulations that would conflict with this federal court ruling.”

Specifically, Sanders refers to the US Treasury Department’s toiling over regulations that would resolve the age discrimination questions.  The agency has said it expects to issue a rule soon outlining how employers calculate benefits payments to retiring workers.