20-4 Pension accounting 3

20-4 Pension accounting 3 - For Pension Plans risky is fine...

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For Pension Plans, risky is fine – Accounting Rules let Companies benefit from Investment upside, escape Consequences of Mistakes Source: Wall Street Journal, 10 December 2003 PINE TREES in a pension plan? In the past decade, many employers have quietly taken on more risk in pension plans -- loading up on stocks, their own secu- rities and nontraditional and illiquid investments -- thanks to accounting rules for pensions that enable employers to capture all of the investment upside, while postponing losses and shifting the conse- quences of poor investment results to their workers and retirees. Consider U.S. Steel Corp. The Pittsburgh steel maker has asked the Labor Department for permission to contribute timber rights on two parcels of Alabama land to its underfunded pension plans, in lieu of cash. The seedlings won't be turned into furniture or pulp anytime soon, but the company says the investment has "long-term growth potential." That may not appear to be the most surefire way to shore up a pension plan that lost $434 million last year. But the move will be immediately profitable for U.S. Steel. Regardless of how well the investments in its pension plan perform next year, the company can assume that the stocks, bonds and timberland earn 8.8%, and it can add that return to its income. U.S. Steel is merely taking advantage of accounting rules that can make pension investments a no-lose proposition for employers. The key to this investing success lies in accounting rules that allow companies to use "assumed" returns for the pension assets. In 2002, large companies generally assumed rates of return between about 8.5% and 9%, though a few used assumptions as high as 10%.
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