Accounting for Public Pensions

Floyd Norris brings up a very good point in his 2010 article for the New york Times, “Accounting for Public Pensions”. It is about the change in the ways that companies mush account for their pension plans. A generation ago the rules for declaring the monetary stakes a company had in these pension plans was changed. Prior to these rules a company could get away with only declaring the actual amount of money invested into the plan. Since the rule change, a company now must estimate the future obligation of the pension. At the time this was a very controversial issue. Many companies were afraid that these new rules would dramatically decrease the profits they were able to report. These new rules were not perfect due to the fact that a company could only estimate the cost of the pension benefits that they would be accruing in a given year. A ‘smoothing’ effect could be used to even out the rise and fall of this estimation caused by market changes of the pension assets. This caused some controversy among people because they argued that the figures were not accurate and could be misleading.

This controversy over the reporting of pension plans has caused many companies to start phasing out defined benefit plans to new employees. The complexity of reporting these pension plans is also a reason some companies do not deal with it. With this complexity comes more accounting hours that the company would have to pay for. There are many more risks associated with a pension plan now that a company must guarantee the investment will grow. This risk does not seem worth it for many companies. Now, instead of pension plans, a lot of companies choose to go with defined-contribution plans. A defined-contribution plan is an investment strategy in which the employee and employer contribute funds to be invested. In this type of plan the employee has much more control over what the money is invested in but they also vary the consequences of the rise and fall of the value of the assets. This has caused far more Americans to be directly involved in the stock market. This involvement intensified the effects of the 2007 economic recession in America. With the effects of this recession being felt by far more people they have had to re-envision their retirement plans. There has been a ten percent increase in people over sixty still holding jobs. It’s not that these people still want to be working; it is because they have to still be working to afford the lifestyle they are accustomed to.

Even though many companies have moved away from defined pension plans, city and state governments have not followed this trend. The main reason for this is because they do not have to follow the same rules of declaring pension plans as publicly and privately held companies do. This does not seem right. The government should be held to the same standards as the corporate sector. Recently, there has been legislation proposed to stop the government from getting special treatment in this area. “Three Republican members of Congress, led by Representative Devin Nunes of California, a senior member of the Ways and Means Committee, proposed legislation to force states and cities to report pension fund liabilities on the same basis, and to force them to disclose market values of assets. The bill would not even allow smoothing, so the state of pension funding will seem volatile as markets rise and fall,” stated Floyd Norris.

Pensions are a very complex and controversial issue in the accounting field. There is not necessarily a correct way to handle this situation. Any way it goes, somebody will be losing out. The only thing that can be done is try to compromise and find the best solution for the entire country.

Norris, Floyd. "Accounting for Public Pensions." New York Times 09 12 2010. n. pag. Web. 31 Oct. 2011. <http://www.nytimes.com/2010/12/10/business/10norris.html?ref=accountingandaccountants>.