The Financial Accounting Standards Board, the body that sets accounting rules
in the U.S., will undertake a project aimed at defining cash-balance pension
plans and measuring obligations under such plans.
"The board wants to nail down what a cash-balance plan is," FASB
spokeswoman Sheryl Thompson said, "and to provide an accounting method
that can be used consistently by companies."
Cash-balance plans promise employees a lump sum when they retire, based on
their average salary over the years. Their popularity has been growing since
the 1980s, because they tend to result in lower overall pension costs and attract
younger employees who change jobs frequently, according to the Reuters news
But lately they've become controversial, amid complaints about fairness. Reuters
notes that last month, a federal judge in Illinois found discrimination against
older employees in International Business Machines Corp.'s switch to a cash-balance
plan in the 1990s.
Traditional pension plans tend to boost the payout for older workers because
they factor in the length of an employee's service and the highest salary earned
over the years. But in a cash-balance plan, the deciding factors are an employee's
average salary over the years and company contributions.
Reuters reports that the FASB's move came after it backed down from a much
more controversial proposal in May. The idea then was to change how company
obligations under cash-balance plans are valued. A task force had suggested
that companies use an interest rate tied to a market index, such as a one-year
Treasury bill, to value liabilities under cash balance plans.
But that sparked an outcry from companies and compensation consultants, according
to Reuters, because they knew it would mean using an interest rate lower than
those tied to high-quality, long-term corporate bonds currently used by companies
to value their liabilities.
That, in turn, would increase the pension liability shown on the balance sheet.
The board decided to reconsider its proposal and asked its staff to reexamine
Reuters, via Yahoo!