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September 26, 2003
FASB to Define Cash-Balance Plans

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.

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"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 agency.

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 the issue.

Source: Reuters, via Yahoo!

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