Pensions and Other Post-Retirement Obligations
- Defined benefit obligations are a large drain on many corporations for the foreseeable future, as a result of both structural problems and misguided management of existing programs. The problem relates to both the magnitude of the shortfalls and how the risks inherent in the mismatch of related assets and liabilities.
- There is broad consensus that current accounting does not reflect economic reality but little consensus on an appropriate solution.
- The existing U.S. rules, made as a compromise in the 1980s, are under review, first, in a specific disclosure project, and later as part of the convergence project. The IASB is reevaluating its rules and looking to the U.K.'s FRS 17 as the likely requirement. This will lead to a significant increase in reported volatility of financial results. The issues exist at the state and federal levels in the U.S. and in many other countries.
- In the last decade, credit rating agencies and most equity and fixed income analysts had not factored pensions into their analysis appropriately. The issue is now highlighted, but its complexity and the nature of the existing disclosures limit the ability of investors and analysts to estimate both reported numbers and the risks that companies will face in the future.
- Various government agencies and quasi-government groups, as well as labor advocates, are all actively engaged in rethinking what to do about the issues.
- Some decisions were made by 12/31/03, however, these decisions are likely to be interim ones at best and are going to need to be revisited quickly as part of a broader review of these obligations and related assets.
Any outcome has broad implications for financial markets, individuals and the broader global economy. While the advisory board was being formulated, Trevor Harris initiated a dialogue among members of the FASB and IASB as well as a corporate treasurer who brought fresh thinking to the regulators' discussion. This dialogue was well received, but it was only a start. While the investor and practice side was represented in the dialogue, there clearly are others who need to be engaged in arriving at a solution. Given that many people worldwide may be affected by the outcome and the potentially political nature of the issue, CEASA's objectivity is ideally suited to helping derive a meaningful resolution.