Corporate Pension Fund Accounting
The Pension Fund Equity Act permits companies to increase the discount rates used for valuing their pension liabilities, thereby allowing them to understate the amounts for which they actually are liable. The FER condemns this imprudent legislative change, and recommends a return to valuing liabilities using a discount rate based on U.S. Treasury interest rates.
The FER is dismayed by the increase in the potential liabilities of the Pension Benefits Guaranty Corporation (PBGC), partly as a consequence of the Pension Fund Equity Act. The PBGC guarantees a minimum pension for retirees, and is funded by premiums paid by companies with defined benefit obligations. The current premiums do not adequately reflect the risk that insured firms will default on their pension obligations. As a result, the PBGC will likely have insufficient funds to pay promised obligations and will have to seek funds from the US Treasury, which is ultimately underwritten by the taxpayer. The FER recommends that plan sponsors be charged a sufficient high penalty rate for underfunded plans so as to cover the PBGC’s expected obligations and encourage management of underfunded firms to take stronger measures to bring themselves to a fully funded status.
