Blogging Employee Benefits

October 14, 2006

FAS 158 Telegraphing Its Punch to Equity

Filed under: Accounting, OPEBs, Pensions — Fuguerre @ 10:20 am

If I were to run an office pool for the after-tax reduction in equity from implementation of FAS 158 for pensions and OPEBs of S&P500 companies, rounded to the nearest billion, what number would you be looking for? Mine would have three digits beginning with a 1, and I’m seriously mulling 9 for my second digit, although I might be convinced to go with an 8 if the markets keep pushing new records.

I’ve been reading with interest Merrill Lynch’s Market Impact of Pension Accounting Reform, which features an estimate of FAS 158’s projected hit to equity due to come this yearend for most U.S. sponsors of pension and other postretirement benefits. Intriguing is that whereas most other analysts who even ventured an estimate couched their appraisals in terms as though the new accounting standard had been implemented at the end of the 2005 fiscal year, Merrill projects forward to the end of the 2006 fiscal year, for most plan sponsors the point when the equity hit will actually land. Roughly capsualized, Merrill picks $217 billion as the after-tax reduction in equity for S&P500 companies. I think it likely that guess will turn out to have been too high.

Just the S&P 500: First, let’s get through the fog that has had some pointing to that estimate as the anticipated equity hit for all pension/OPEB sponsors. As best as I know, the only guess for the entire population of U.S. companies was extrapolated by the SEC in its mid-2005 Report and Recommendations Pursuant to Section 401(c) of the Sarbanes-Oxley Act of 2002 On Arrangements with Off-Balance Sheet Implications, Special Purpose Entities, and Transparency of Filings by Issuers: $414 billion off-balance sheet liability for pensions and $121 billion for OPEBs, adding up to $535 billion. As that was a pre-tax off-balance sheet number, using Merrill’s tax rate assumption of 35% would trim even that half-trillion number down to an after-tax equity hit of $348 billion. And then as the SEC extrapolations depended on data from 2004, a year earlier than the data gathered by Merrill, and since 2005 improved the forthcoming FAS 158 outlook for most companies, it’s not difficult to imagine that were the SEC’s extrapolations to mimic Merrill’s projection to the end of 2006, we might see a number for the expected after-tax equity hit for the entire universe in the neighborhood of $300 billion. Which would not be altogether inconsistent with Merrill’s $217 billion, as long as Merrill’s figure is properly reported as representing the S&P 500 set, versus all companies.

Pension Cost Projection. So far, the part of Merrill’s report I find the least credible is its projection of net periodic costs during the 2006 fiscal year. For Boeing, which they use to illustrate their methodology, they project a net periodic pension cost of $608 million and a net periodic OPEB cost of $602 million for fiscal year 2006. That OPEB estimate might not actually be all that distant, but Boeing’s second quarterly report for the 2006 fiscal year shows net periodic pension cost for the first 6 months of 2006 ringing in at $529 million, on course to top $1 billion for the full year. That as compared with a 2005 net periodic pension cost for Boeing of $751 million (with the $552 of “Other” cost cited by the Merrill report constituting FAS 88 recognition). And although Boeing’s increase in net periodic pension cost of over 33% from 2005 to 2006 will be near the top of the list of cost increases, anticipate the median for S&P 500 pension sponsors to be in the same direction: conversely to the very much criticized early 2000s, when net periodic pension credits continued to be reported by many pension sponsors despite the onset of the perfect storm of market crashes and interest rate declines, 2006 will be a year when pension costs increase for the majority of companies, despite favorable markets and rising interest rates. (One wonders if we’ll now see the same criticism coming back in the other direction, arguing that corporate profits ought be higher for 2006 because pension costs are presumably being “overstated.”) Anyway, if Merrill’s estimate for Boeing’s pension cost serves fair indication for the entire study set, I think we can almost dismiss that part of the methodology. I’m not yet sure how their number went so far astray, and am engaged in checking with several close actuarial and accounting colleagues to get their take on the matter: even without poring through interim financial reports, these projections ought not be so significantly off target, else one starts to seriously wonder whether the remainder of the projection methodology has any similar disabling deficiencies.

OK, but if Merrill’s pension cost projection is similarly understated for the entire S&P 500, what does that do to their $217 billion result? Actually, less than one might think. Material underestimation of net periodic pension cost might mean we should increase Merrill’s projection of a $397 balance sheet liability, yes. But much in the same way that, as Merrill points out, employer contributions do nothing to the hit to shareholder equity arising from FAS 158 implementation, likewise that hit is relatively immune to 2006 cost. The only cost components that matter, actually, are the amortization pieces, since they will affect the amount of unrecognized balances that are the basis for the equity hit. So back to comparing Merrill’s Boeing with Boeing’s 10-Q: Merrill projects amortization cost components of $823 million for 2006, while annualizing the second quarter report suggests the actual number will be $1.1 billion. Still a significant difference between projection methodology and reality, but less than for the full pension cost, and particularly less in the context of the understatement relative to the full balance of unrecognized amounts. And interestingly, of the opposite effect as with the overall cost understatement. So here’s another one for those who actually believe that we’ve made pension accounting more understandable: although by underestimating net periodic pension cost, Merrill may have underestimated the projected balance sheet liability, underestimating the amount of reduction in unrecognized balances means that they overestimated the expected hit to shareholder equity, at least with respect to that piece of the puzzle.

Ignoring the Freeze. Merrill’s recent reports have done as much if not more than any other research to track and analyze the pension ice age, and this report continues that commendable effort. Yet despite the intricate complexity of the rest of its projection methodology, Merrill stopped short of incorporating known pension freezes into its estimate of the FAS 158 hit, stating that, “For these companies, a figure closer to their ABO is likely more accurate; appropriate adjustments should be made for these specific situations as the charge to equity will not be as severe.” Yes, to put it rather mildly so. In practice, although the decrease from PBO to ABO can be significant enough to add up to some billions for the pension ice cubes out there, for some cases the effect on our hit to equity can actually exceed that PBO-ABO number, since there we’re looking at an immediate acceleration of recognition of significant accumulated net losses. Which under FAS 88 sends the effect of the freeze through the company’s P&L, but then accordingly removes that effect from FAS 158’s equity hit. In other words, as Merrill implicitly acknowledges but without fully completing the thought, some of that $217 billion number represents amounts that will have already been recognized in 2006 net income.

FAS Implementation Date or FYE 2006? As near as I can make out, Merrill is updating data from fiscal years ending in 2005 to the end of the 2006 fiscal year. For employers with calendar fiscal years, that does in fact bring us to the FAS 158 effective date. But for almost all others (other than the very rare employer with fiscal year ending from 9/29 through 12/15 who could delay implementation until the year ending in 2007, but instead elects early adoption), the projection leaves us a year short of actual FAS 158 adoption. And for almost every one of those employers, we’re leaving out a good year, one when the much-discussed new volatility inherent in FAS 158 goes in the employer’s favor, significantly cutting into the eventual hit to shareholder’s equity. OK, the overwhelming majority of the S&P 500 have a calendar fiscal year, but characterizing FYE 2006 numbers as projected FAS 158 numbers still overstates what the aggregate hit to equity will eventually be at actual FAS 158 implementation by at least several billions.

Is Merrill Warning of a Q4 Bear? Assets during 2006 projected using a 5% rate of return?! Not only have we already seen a median pension asset return exceeding 10% for the S&P 500 companies with non-calendar fiscal years (such as those ending 6/30/2006) that have already released their 2006 annual financial statements, but these past several months have been more than kind to pension funds. OK, sure, reports such as this one do not constitute any formal Merrill prediction of future markets; and granted, a firm in Merrill’s position probably does better to err on the conservative side rather than risk raising false hopes. Even so, we’re close if not well beyond the point at which in order for Merrill’s 5% to be anywhere near reasonable for the full year, they essentially had to be factoring in a very major bear market for the final quarter of 2006. Interestingly, their assumption on the liability side of the equation of a 25-basis-point increase in discount rates might not be so far off the mark: although 2005-to-2006 rates roller coastered for companies with mid-year financial yearends so that some increased discount rates by 100 basis points and more, we’re already back down to levels where Merrill’s view of interest rates makes sense. But that investment return assumption! Sorry, but I don’t buy that one.

All of Which Drops My Own Guess Below $200 Billion. I see enough right in the background data and in the rest of Merrill’s work that says if I can start with their $217 billion, then shave off some of the unrecognized balance for underestimated cost amortizations, drop some more unrecognized balance for 2006 freezes, put everything in terms of FAS 158 implementation in lieu of FYE 2006, and be a little more relaxed with my investment return expectations, I’m going to be pretty solidly below $200 billion if I go into my hypothetical office pool. For the S&P 500. (And completing the loop back to the SEC’s estimate, I’d see that as consistent with about a quarter trillion after-tax hit to equity for the entire universe at the point of FAS 158 implementation.) Just one blogger’s guess, though.

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October 12, 2006

Embroidering on Early FAS 158 Boilerplate

Filed under: Accounting, OPEBs, Pensions — Fuguerre @ 10:34 pm

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS No. 158”). SFAS No. 158 requires an employer that sponsors one or more single-employer defined benefit plans to (a) recognize the overfunded or underfunded status of a benefit plan in its statement of financial position, (b) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87, “Employers’ Accounting for Pensions”, or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, (c) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end, and (d) disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. SFAS No. 158 is effective for the Company’s fiscal year ending February 22, 2007. The Company is in the process of evaluating SFAS No. 158.

So reads an excerpt from New Albertson’s recently filed 10-Q filing for the quarterly period ended August 31, 2006. Almost verbatim is an excerpt from the recent quarterly statement filed by Levi Strauss, and close variants or simplified versions appear in the 10-Qs of OMNOVA Solutions, Apogee Enterprises, Circuit City, Sealy, Bed Bath & Beyond, Constellation Brands, RPM International, A.G. Edwards, Herman Miller, The Mosaic Company, U.S. Cellular, Telephone and Data Systems, and Chattem, to point out but a few of the statements filed since the September 29 publication of the new accounting standard.

Stretching slightly farther is Lehman Brothers, whose 10-Q supplements the boilerplate norm with the most basic financial conclusion of a retrospective calculation that FAS 158 itself neither requires nor permits, but which can nonetheless provide some indication of potential effect, provided one factors in the rise in interest rates and the gains in the equity markets since the prior yearend –

Based on information available at November 30, 2005, we would have reduced Accumulated other comprehensive income (net of tax) by approximately $300 million. The actual impact of adopting SFAS 158 will be dependent upon the then current fair value of plan assets and the amount of projected benefit obligation measured as of the adoption date.

But so far, Hartmarx takes the first 10-Q batch’s award for the best FAS 158 commentary, managing in its brief summary not only to provide an estimate of financial effect more recent than the 2005 yearend, but also to assure investors that debt covenants will remain unaffected, as well as to point to the distinct possibility that the company could decide to be a FAS 158 early adopter. A great model, a standard other employers should reach for in making their own statements during this brief period prior to the effective date of the new rules –

In September 2006, FASB issued Statement of Financial Accounting Standards No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans – an Amendment of FASB Statements No. 87, 88, 106 and 132(R) (“SFAS 158”). SFAS 158 requires an employer that is a business entity and sponsors one or more single employer benefit plans to (1) recognize the funded status of the benefit in its statement of financial position, (2) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost, (3) measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year end statement of financial position and (4) disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs on credits, and transition asset or obligations. SFAS 158 is effective no later than the end of the Company’s fiscal year ended November 30, 2007. Since SFAS 158 was recently issued, management has not yet determined whether SFAS 158 will be adopted early in its statement of financial position as of November 30, 2006 or if SFAS 158 will be adopted in its statement of financial position as of November 30, 2007. If SFAS 158 had been effective as of August 31, 2006, total assets would have been approximately $18 million lower, total liabilities would have been approximately $9 million higher and shareholders’ equity would have been approximately $27 million lower. Because our net pension liabilities are dependent upon future events and circumstances, the impact at the time of adoption of SFAS 158 may differ from these amounts. Adoption of SFAS 158 will not have any effect on the Company’s compliance with its debt covenants.

September 29, 2006

FAS 158: Pensions and Other Postretirement Benefits

Filed under: Accounting, OPEBs, Pensions — Fuguerre @ 10:29 am

The Financial Accounting Standards Board has published Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension Plans and Other Postretirement Plans, requiring sponsors to recognize the funded status of their retirement programs on the company’s statement of financial position. [News Release] For pension plans, the funded status is determined as the excess or deficit of the market value of plan assets over the projected benefit obligation. For other postretirement benefit plans, such as retiree health benefit plans or life insurance for retirees, the funded status is determined as the excess or deficit of the market value of any plan assets over the accumulated postretirement benefit obligation.

Plan assets and obligations must be measured as of the employer’s fiscal year-end statement of financial position.

An employer with publicly traded securities must apply the new reporting requirements and related new footnote disclosure rules for fiscal years ending after December 15, 2006. The new measurement date requirement applies for fiscal years ending after December 15, 2008.

July 27, 2006

Measurement Date Change Pushed Back

Filed under: Accounting, OPEBs, Pensions — Fuguerre @ 7:29 am

Plan assets and benefit obligations for pension plans and other postemployment benefits (OPEBs) are to be measured as of the close of the employer’s fiscal year, beginning the first fiscal year ending after December 15, 2008, according to a decision reached at yesterday’s meeting of the Financial Accounting Standards Board. [Board Meeting Handout, pp. 3-6] For an employer with a calendar fiscal year, the new rule will require a 12/31/2008 measurement for balance sheet numbers reported as of 12/31/2008 and for costs for the 2009 fiscal year.

Under current U.S. GAAP, as governed by FAS 87 and 106 for pensions and OPEBs, an employer is permitted to select a measurement date up to 3 months before the end of the employer’s fiscal year. The FASB’s exposure draft of phase 1 of its two-phase project to revise pension/OPEB accounting proposed eliminating the 3-month period. However, the exposure draft would have required that change more quickly: for a calendar year fiscal period, a 12/31/2007 measurement would have been required for the 2007 year-end balance sheet, but an earlier 12/31/2006 measurement would have been required for 2007 costs.

Yesterday’s decision not only defers the measurement date change, but eliminates the need for an extra measurement date for measurement of cost. The issue of the cost measurement has been the source of some confusion, even among the FASB itself. Yesterday’s discussion clarified that use of an early measurement date for cost merely shifts the cost measurement, rather than the cost itself. That is, for a calendar year employer that uses a 9/30 measurement, the 9/30/2007 measurement will be determining the cost to be reported for the period 1/1/2008-12/31/2008: although that cost may technically be based on accruals and demographics specifically for the year beginning 9/30, that cost is treated as the cost for the fiscal year 2008. Thus, there is not an additional quarter of cost during the transition to the 12/31/2008 measurement; rather, each year’s cost includes one year’s worth of costs, merely measured as of different dates for the 2008 cost versus the 2009 cost. FASB slightly complicated that explanation a bit further by characterizing the 2008 cost as the “last 80%” portion of the 15-month period measured as of 9/30/2007, but that simply returns us to the same position of requiring us to use the annual amount measured on 9/30/2007 as the periodic cost reported in 2008: even my simple math tells me that unless your actuary gets far more detailed with a 15-month valuation than FASB’s principle-based rules expect, prorating an annual valuation up to 15 months in order to recognize an extended period through to the next measurement, then taking 80% of that number, gets you back to 100% of the original number. The point being that we won’t see a bump-up of approximately an extra quarter’s cost for the transition to the new measurement date: all we get is one year’s costs in each year, measured as of one date under the existing rule and as of a different date under the new rule.

FASB struggled over the measurement date issue more than any other issue raised by its exposure draft, actually coming close to pushing the change off until phase 2 of its project, which is expected to take 2-3 years beyond this year’s conclusion of phase 1. The 2008 compromise keeping the measurement date change in phase 1 seemed a nod to the very strong opinions of one FASB contingent that sees no difference between valuation of pension/OPEB arrangements versus other complicated financial arrangements required to be valued as of the fiscal year end.  FASB staff noted that only about one-third of S&P 500 companies currently report using a measurement date different than the fiscal year end, but only hinted at vague awareness that those disclosures give an incomplete snapshot: accelerated measurement dates are far more common among smaller firms and almost universal among firms with non-calendar fiscal years, and even many of the larger calendar-year employers that report using a fiscal year-end measurement date for domestic pension plans use a different measurement date for OPEBs and foreign plans.  Perhaps the strongest advocates for the measurement date change implicitly made the case for giving a longer period for making the change: since “advance planning” is required in order to perform a year-end valuation in time to have a year-end measurement date, the anticipated September 2006 publication of the formal new accounting standard for phase 1 of the pension/OPEB project was starting to squeeze the time being given for getting that advance planning completed.

April 1, 2006

Proposed Pension/OPEB Accounting – Old Transition Balances

Filed under: Accounting, OPEBs, Pensions — Fuguerre @ 4:09 pm

Shorthand, proposed new GAAP for employers' accounting for pensions and other postemployment benefits would move unrecognized balances currently disclosed in financial statement footnotes up to the sponsor's balance sheet, effective for fiscal years ending after 12/15/2006. (See yesterday's post here for a brief overview.) For the most part, this major thrust of phase 1 of FASB's project would affect only the balance sheet through direct charges or credits to other comprehensive income, without passing through net periodic pension or OPEB cost, for which the unrecognized balances would continue to be maintained pending decisions to be made by FASB in phase 2 of its pension/OPEB accounting standards project. For remaining unrecognized transition balances remaining from implementation of the current standards, however, the proposed rule would take a slightly different approach. In fact, although the net balance sheet result as of the effective date of the new standard would be the same, some companies would need to restate income for one or more past fiscal years.

Upon implementation of the currently applicable pension accounting standard in 1987, the initial difference between a pension plan's projected benefit obligation and market value of assets was established as an unrecognized net transition asset or obligation, thereafter recognized regularly in net periodic pension costs, generally over the average remaining service period of active employees expected to receive benefits under the plan (or 15 years, if so elected by the employer for plans where the average remaining service period was less). [SFAS 87 ¶77] A similar transition rule applied beginning in 1993 for implementation of the comparable OPEB accounting standard, with employers permitted to elect immediate recognition or 20-year recognition in lieu of recognition over the remaining service period of employees expected to receive benefits. [SFAS 106 ¶110-112] Acceleration of recognition of pension/OPEB transition balances is required under current rules upon certain plan settlements or curtailments. [SFAS 88; SFAS 106 ¶90-99]

The new accounting standard proposed in FASB's new exposure draft would require immediate balance sheet recognition of unrecognized pension/OPEB amounts for employers' financial statements issued for fiscal years ending after 12/15/2006, that is, for the 12/31/2006 financial statement for a company with a calendar fiscal year. The new rules are to be applied retrospectively for all comparative balance sheet amounts that are presented on any financial statement prepared under the new GAAP, unless it is impractical to do so due to an inability to assess period-specific realizability of associated incremental deferred tax assets. For example, if a company's financial statement presents statements of changes in shareholder equity for the two most recent fiscal years ending 12/31, and if the impracticability exception does not apply, then upon implementation of the new standard on 12/31/2006, the balance sheet amounts for 12/31/2006, 12/31/2005, and 12/31/2004 reported in that 12/31/2006 financial statement would be required to follow the new standard.

As of the earliest date for which such retrospective application is applied, the opening balance of the company's retained earnings is to be adjusted by the balance of pension or OPEB unrecognized net transition asset or obligation that had been present at that time, net of tax. For any subsequent fiscal years through the date of the initial application of the new standard, the company's income is to be adjusted by any amounts that had been recognized in pension or benefit costs for those periods, net of tax, presumably including the effect of reversing out any cost recognition that had occurred upon any settlement or curtailment during those periods. For any fiscal years after the first fiscal year ending after 12/31/2006, no old transition amounts are to be recognized as a component of pension or benefit cost.

For the majority of companies that sponsor defined benefit pension plans, no old pension transition balances would have remained with respect to U.S. plans as of the earliest retrospective application date, although a later SFAS 87 effective date for non-U.S. pension plans have left remaining transition balances for those plans more common. The later effective date of SFAS 106, together with the current permissibility of 20-year recognition spreading, also make remaining transition balances more common for retiree health plans and other postemployment benefits. Even for employers that do have old transition balances as of the earliest retrospective application date, the relevant amounts tend to be insignificant relative to net pension or OPEB costs, and even more negligible relative to the total net income of the company. Still, the proposed rule for those transition balances is a specific nuance against the exposure draft's general rule that balance sheet amounts are charged or credited without affecting net income.

The following table shows some illustrative amounts under the proposed rule for transition amounts for several companies, in each case presuming retrospective application as of 12/31/2004 and 12/31/2005 for implementation of the new standard as of 12/31/2006, shown here prior to adjusting for tax, with amounts drawn from recent 10-K filings (all dollar amounts in millions). And remember, this is only the effect with respect to the unrecognized transition balances, which of course is swamped in comparison by the financial effect of the remaining rules of the proposed new standard.

  GM IBM duPont BellSouth
Pension Plans
Adjustment to 12/31/04 Retained Earnings – 43 98 18 0
Adjustment to 2005 Income 7 – 82 – 5 0
Adjustment to 2006 Income 6 – 6 – 1 0
OPEBs
Adjustment to 12/31/04 Retained Earnings 0 0 0 38 *
Adjustment to 2005 Income 0 0 0 80
Adjustment to 2006 Income 0 0 0 60
Pensions and OPEBs
Adjustment to 12/31/04 Retained Earnings – 43 98 18 38
Adjustment to 2005 Income 7 – 82 – 5 80
Adjustment to 2006 Income 6 – 6 – 1 60

* Note – BellSouth disclosed an OPEB net transition asset as of 12/31/2004, hence in this example would increase retained earnings (after adjusting for taxes) at that point if that were its earliest date of retrospective application. However, no doubt due to different recognition periods for different OPEB plans, the company subsequently was reporting an OPEB net transition obligation and reported net transition costs for 2005 and 2006 under existing accounting standards, hence would retrospectively increase net income (again, after adjusting for taxes) for those years under the new standard.

March 31, 2006

FASB Exposure Draft of New GAAP for Pensions and OPEBs

Filed under: Accounting, OPEBs, Pensions — Fuguerre @ 7:48 am

The Financial Accounting Standards Board has published its exposure draft of a new accounting standard for employers' accounting for defined benefit pension plans and other post-employment benefits. [No. 1025-300; News Release]

  • Unrecognized Balances Move To Balance Sheet – Unrecognized gains or losses, unrecognized prior service costs from plan amendments, and any remaining unrecognized net asset or obligation from original transition to the current accounting rules would be reported as a charge or credit to other comprehensive income (OCI), net of tax timing differences, essentially decreasing or increasing the net worth of the company. For the overwhelming majority of employers that sponsor defined benefit pensions or OPEBs, the change would reduce or even eliminate the company's net worth, due to huge balances of unrecognized net losses accumulated through the past six years of declining interest rates and weak asset returns during 2000-2002.
  • Measurement Date Synchronized With Financial Statement Date – The measurement date would be required to be the close of the fiscal year, instead of the current rule that permits measurement as early as 3 months before the close of the year.
  • Effective As Early As End of 2006 – The key balance sheet changes would be effective for fiscal years ending after 12/15/2006. For any financial statement issued under the new standard, all previous years that are displayed would be required to use the new rule for relevant balance sheet amounts, unless impractical to do so. For balance sheet reporting by all employers, the measurement date change would be effective for fiscal years ending after 12/15/2007. For that change, previous years reported on any financial statement should use the amounts determined as of the original measurement dates. For determination of pension or OPEB cost for taxable public employers, the measurement date change would be effective for fiscal years beginning after 12/15/2006. For determination of pension or OPEB cost for tax-exempt entities and non-public entities, the effective date would be delayed a year, to fiscal years beginning after 12/15/2007.

FASB seeks comments on the exposure draft by 5/31/2006. The final standard is expected to be published in September 2006. Following publication of the final standard, FASB would proceed to phase 2 of its pension/OPEB project, conducting a sweeping overhaul of the complete standard for measurement and reporting of pension and OPEB costs, assets and obligations.

See Fugue: Accounting for links to additional source documents and previous Pensions & Benefits Weblog posts on the FASB pension/OPEB accounting project.

March 17, 2006

Retiree Health Benefit Rights Restricted to CBIA Term

Filed under: Collective Bargaining, Litigation, OPEBs — Fuguerre @ 4:45 pm

The distinction between lifetime benefits and vested benefits is “a legal distinction that understandably escaped” many of the retirees.

Finding no patent or latent ambiguity in collectively bargained insurance agreements (CBIA), the 7th Circuit affirmed a district court ruling that an employer was not obligated to extend retiree health benefits beyond the term of those agreements. [Cherry v. Auburn Gear, Inc.] CBIA language explicity stated that retiree health benefits expired at the end of the contract’s term. Although retirees tried to argue that reference to the singlular “program” indicated that the term limits did not apply to both retirees and active employees, the appeallate court found no merit in that argument, applying “program” to the entire agreement. Neither was the court persuaded by retirees’ reliance on CBIA terms providing lifetime survivors benefits, distinguishing the provision as referring to eligibility of individuals under the agreement, rather than to the duration of the agreement. Nor did similarity in language between the pension plan and the CBIA alter the presumption against vesting of retiree health benefits absent express language to the contrary. Finally, retirees’ claims of objective evidence were insufficient to demonstrate latent ambiguity.

As we stated in a similar case, “this story does not have a happy ending.”

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