Pensions

The airline industry and its pension plans have been the subject of hearings on Capitol Hill and of course accounting is the major issue. Pension accounting is difficult enough for accountants, but put in the hands of politicians and there can be real problems. This does not excuse accountants who should be embarrassed by the pension standard.

Here are some comments from the L.A. Times :
Sen. Charles E. Grassley (R-Iowa) on Tuesday said United took advantage of accounting loopholes to meet the legal requirements for its pension plan, even though funding was falling far short of demands. One such technique is known as "smoothing," which allows companies to project past financial gains into the future, creating a false picture of a fund's stability.

Grassley compared United's pension bookkeeping to with the "phony accounting" of Enron Corp. but added that there was "a very significant difference: Unlike Enron, however, everything United did was perfectly legal. In fact, what the company did is accepted practice by pension plans everywhere."

Sentiment is growing in Congress to force changes to strengthen the pension system, but it is far from clear what measures will be adopted. Moreover, too-tough legislation could lead more companies to abandon pensions because they are under no obligation to provide them.

However there is no reason that many companies should not have done a better job funding their pension plans. Right now we are examining Anheuser Busch in my core MBA class and even this company that is a cash machine is underfunded by $705M (up from $640), when comparing the projected benefit obligation to the fair value of plan assets. Now of course Bud shows prepaid pension cost asset of $527M as a result "unrecognized net acturial losses" and "unrecognized prior service costs" that total $1.2B. Only accountants could make acturial losses into an asset component...

During this period when Bud's pension plans were becoming severely underfunded (the underfunding represents 24% of the projected benefit obligation) the board of director's has made contributions of only $187M, $75M and $201M. So even though Bud made an accelerated payment during 2005, the plan became even more underfunded. What makes this even worse is that Bud has repurchased $6 B dollars of treasury stock over the last three years. By diverting 10% of these resources to its "most valuable assets" Bud could ensured that its pension plans were in much better shape.