The Atlanta Journal-Constitution - June 26, 2005
 

RETIREMENT FUND WORRIES:

Health of plans hard to compare

Robert Luke - Staff


Is the pension fund at Aflac, the highly profitable insurance company, worse off than that of financially ailing Delta Air Lines?

By one measure it is. The most recent data show, for example, that Aflac's pension plan is only 53 percent funded based on its future obligations. Delta's pension, albeit with a larger deficit in dollar terms, is about 56 percent funded.

Yet by another and perhaps more realistic assessment, Aflac doesn't look so bad after all. In fact, the Columbus-based insurer now says its pension is more than amply funded.

The difference between those two views --- akin to night and day --- underscores the difficulty in assessing the health of corporate America's pension funds and the arcane nature of pension accounting.

Those complex rules involve making certain assumptions, which companies can manipulate.

That means some companies report that their pension plans are fully funded when, in fact, they are substantially underfunded.

Conversely, a company like Aflac reports that it's underfunded when, in fact, it could easily keep its pension fully stocked.

The discrepancies may explain why it is so difficult for employees and investors alike to determine whether their companies have pension problems.

Experts say the best bet is to determine the reasonableness of the assumptions being used by a company, such as the expected rate of return on a pension fund's investment portfolio.

"How do they compare with what other companies are doing? Are they in the mainstream?" are among the questions to ask, says Dennis R. Beresford, a University of Georgia accounting professor and former chairman of the Financial Accounting Standards Board.

It's also important to consider the demographics of a company's work force and the financial health of the company sponsoring the pension plan, he says.

But mostly, it's helpful to have a basic understanding of the workings of pension plans, which promise to pay workers a specific monthly amount at retirement.

That sum, which is known in advance by the company, is based on factors such as age, earnings and years of service.

To be able to pay those benefits, employers make contributions to their pension plans.

Typically, that money is invested in stocks and bonds by professional money managers. In Aflac's case, that's Merrill Lynch.

Because of that promise to pay, the employer bears the investment risk and must make up for any investment losses.

IRS review

That's not the case with defined-contribution plans, such as 401(k) plans. In those, employees contribute a portion of their pay and decide how the assets are invested, choosing among investment options made available by the employer. Some firms also match, to a certain level, worker contributions.

A traditional pension is considered underfunded when its benefit obligations --- the amount it owes current and future retirees --- exceed the assets accumulated in the investment portfolio. In Delta's case, pension plans covering about 80,000 employees and retirees had only $6.8 billion in pension plan assets last year to cover $12.1 billion in obligations.

In the last decade, unprecedented stock market gains allowed many companies to temporarily stop making contributions to their pension plans. That's not the case now.

Each year, the Internal Revenue Service reviews pension funds to see whether they might be underfunded. If they are, an employer must make contributions to bring plan assets back into line with future liabilities.

However, there's no uniformity in calculating those liabilities, according to Bradley D. Belt, executive director of the Pension Benefit Guaranty Corp.

For example, an actuary hired by a company for its pension plan has some discretion in selecting the actuarial assumptions used to determine pension obligations, Belt says. His federal agency insures --- to a point --- benefits for 44.4 million private-sector workers and retirees in more than 31,000 pension plans.

"First of all, you have to assume how many employees will continue to work, how long they will live, what their final rate of pay will be," Beresford says. "Then you have to determine what the assets you set aside will earn. You also have to discount the pension obligations because the payments will be made 20, 30, 40 years in the future."

In the past, some companies have raised the expected long-term rate of return of their investments, thus reducing the need to contribute additional money to their pension funds. Others have reduced their pension liability by assuming a higher discount rate.

Different views

But the opposite is occurring now, boosting funding shortfalls.

Businesses use two methods by which to calculate their pension liabilities for financial reporting purposes. One is more conservative, according to Beresford. It projects benefit obligations and assumes those in the work force will continue to earn more benefits and receive pay increases.

Using that measure, one could conclude that Aflac's U.S. pension fund is worse off than Delta's.

But by another, more liberal measure, Aflac's pension plan appears better funded. That measure provides a snapshot of the pension fund as if all employees were retired now.

"Different people have different views as to which is more meaningful," says Beresford, who prefers using the latter measure with Aflac, which has fewer retirees and a younger work force than Delta.

The insurer currently has about 4,400 employees in the United States and about 350 retirees. Another 350 workers or so are expected to retire through 2010, says Peter Adams, Aflac's assistant treasurer and vice president of financial operations.

To compare, Delta has 54,000 active employees and 27,000 retirees, according to Anthony Black, a Delta spokesman.

Beresford says it's not unusual for growing companies with younger workers, such as Aflac, to stretch their pension contributions over a longer period.

"Pensions are considered a sort of long-term cost of doing business, and you want to record that expense over the expected working lives of the employees," Beresford explains.

"But with the auto companies and Delta, they have more current retirees. And they probably have an older work force because many of the younger people have been laid off in cutbacks. That compounds the problem."

Legislation sought

And while Aflac is making money --- per-share profits have more than quadrupled over the past decade --- Delta has lost more money in the last four years than it has earned in all of its 76 years.

"From an investor standpoint, you obviously want to be sure that this is not a pension obligation that's going to be more costly than the company can afford going forward," Beresford says.

Cash-strapped Delta is seeking federal legislation to allow it to stretch out its pension contributions over 25 years. Under current funding guidelines, the carrier estimates it will have to inject more than $3 billion into its pensions over the next three years.

Beresford notes that most companies prefer not to put any more money into their pension funds than what they can currently deduct for tax purposes.

For the last 10 years, Aflac's policy has been to make cash contributions at or near the maximum deductible limit, says James D. Davis, principal and actuary at Milliman Inc., which provides pension consulting services to Aflac.

"To that point, Aflac last year made a $17.8 million contribution for plan year 2003 and preliminarily intends to make a sizable contribution by Sept. 15 for plan year 2004," Davis says. "We are currently determining what that amount will be. But it will exceed the amount required" under federal pension rules.

Those rules, under the federal Employee Retirement Income Security Act, or ERISA, allow companies yet another way to calculate their pension liabilities and value their pension fund assets.

Under ERISA and Labor Department guidelines, Aflac's pension fund is adequately funded, according to Davis. "As of Jan. 1, the plan is funded at 115 percent, which means that assets are well in excess of liabilities," he says.

Companies are required by law to provide employees with a summary annual report describing their plan's funded health. Some employers do more.

"Aflac's participants are also able to go out on the Internet, to a Merrill Lynch Web site, and model their own personal benefits as frequently as they choose," Davis says.

--- Staff writer Russell Grantham contributed to this article.