Pension Accounting Changes Negatively Affecting Earnings Statements

January 27, 2012 ( – As companies issue their earning statements for 2011, many are reporting a charge due to pension accounting changes.

The Boeing Company, AT&T, UPS, Windstream Corp. and FirstEnergy Corp. all announced that lower discount rates and a change to recognizing pension gains and losses in the year in which they occur, rather than amortizing them over time, has resulted in a charge for pensions. In 2010, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) came to an agreement on reporting changes in pension values and cost immediately (see FASB, IASB Reach Tentative Agreements on IAS 19).  

Pension plan sponsors expected to face increased pension contributions and expenses due to market volatility and low interest rates, higher funding requirements of the Pension Protection Act, the introduction of mark-to-market balance sheet requirements and expanded disclosure under U.S. and international pension accounting standards (see Plan Sponsors Can Expect Contribution Increases in 2012).  

UPS, Windstream and FirstEnergy all announced that they are recording actuarial gains and losses, on the income statement, in the year incurred rather than amortizing them over time. A mark-to-market adjustment will be made in the fourth quarter of each year reflecting actuarial gains or losses that fall outside a recognition corridor (10% of the greater of plan assets or benefit obligations). These gains or losses result from changes in discount rates, the reconciliation to actual return on plan assets and other actuarial assumptions.   

The adoption of the new methodology must also be applied retrospectively to prior periods. 

UPS expects to record a pre-tax $827 million charge for the 2011 mark-to-market adjustment. On a GAAP basis, diluted earnings per share for the fourth quarter and total year will be reduced by $0.51 and $0.41, respectively, which is inclusive of both the mark-to-market adjustment and the benefit resulting from the accounting change.  

Based on preliminary estimates, Windstream expects to incur a pre-tax, non-cash charge of approximately $163 million during the fourth-quarter of 2011 as a result of the accounting change, after consideration of the retrospective adjustment of financial results for the first three quarters of 2011. The charge is due to a decrease in the discount rate from 5.31% to 4.64%, and lower-than-expected returns on plan assets.   

AT&T ended 2011 on a down note, posting a $6.7 billion loss in the fourth quarter due largely to a change in how it accounts for its employee pension benefits and the breakup fee it was required to pay after scrapping its bid to buy T-Mobile USA.   

Boeing said pension costs will probably rise to $2.6 billion this year from $1.6 billion, an increase of $0.83 a share.  

However, the firms noted that the changes do not affect participant benefits or plan funding.  

A Boeing spokesperson told PLANSPONSOR, “The point is that the lower discount rate requires us to book a higher pension expense that has a negative effect on our financial performance, but in no way changes our commitment to managing and funding the pensions well. Boeing pensions are well funded and well managed – they are 99% funded on an ERISA basis (Dept. of Labor Federal standard for private pensions) and 75% on a GAAP basis (SEC regulatory reporting). As such we expect minimal mandatory contributions in the next year or so; however, because we manage our funds prudently, we will make about a $1.5 billion discretionary contribution this year.”