Projected vs. Accumulated Benefits: An FASB Hearing Stirs Up a Hornet's Nest

A FASB roundtable on a proposed standard for pension standards produced heated debate, with the FASB, SEC and investor representatives favoring projected benefits (PBO) and acturaries, accountants and business executives favoring accumulated benefits (ABO). Actuary William Sohn asserted that the PBO method assumed that the employee would continue indefinitely which he considered an unrealistic assumption. Scott Taub of the SEC countered that flexibility was essential and 100% precision on accounting numbers could be compromised if needed. Although investors favor the information content of the PBO method, they fear that a strong move to PBO might force many companies to eliminate or heavily change present pension plans. Chairman David Tweedle of the International Accounting Standards Board pointed out that IASB was watching with considerable interest; IASB plans to address smoothing of income statement effects of pensions first, then go to recording of pension liabilities. The proposed FASB standard, if adopted, would begin taking effect at the end of this year.

All but the most devoted partisans of the efficient market hypothesis probably would agree that some form of pension liability should be recorded on the balance sheet, especially for defined benefit plans. At the same time, the fear of companies abandoning, reducing coverage or modifying pension plans, especially if defined benefit, is a very real fear. My inclination would be to go with ABO, make sure that smooching and disclosure issues are thoroughly addressed with appropriate sanctions for non-compliance, then revisit PBO vs. ABO in 3-4 years after more information is available.