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A provision in the just-passed transportation bill will allow corporate pension plans to use the...
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Friday, June 29, 2012, 3:32 PM ETA provision in the just-passed transportation bill will allow corporate pension plans to use the average interest rate over the past 25 years (high) as opposed to the last 2 years (low) towards calculating future returns. At a stroke, under-funded plans at companies like GM and F just became less so (and reported profits should benefit as well).
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This news story has 19 comments:
do you think for a minute that if interest rates were at historic highs corporate america would be complaining about unrealistic pension assumptions?
when accounting regulations squeeze corporate america they cry like spoiled children and scream for relief from their sugar daddy's in congress just as the banking industry did when they didn't want to comply with mark to market rules.
WTF is congress doing mandating accounting regulations anyway? those morons don't know a debit from a credit..but they do know who butters their bread.
apply ben's bank accounting to business pensions and then, do a "stress" test
When you can't pay off a debt and the debt holders prevent the debt bring inflated away, you get stagflation and no growth.
Here's what's happening:
When interest rates are low, the funding rules call for companies to put more money into their pension plans, on the assumption that the money will compound more slowly. Thus, by having a average that includes the higher interest rates from the last 25 years, viola, you get a lower contribution to the plans and thus increased profits.
Ironically, the GASB is changing the way that States & Cities post their pension liabilities showing the unfunded liabilities on the books officially, and entities that have an incentive to pretend that these liabilities aren’t real liabilities are going to get a rude awakening – see Stockton, CA.
Kevin Williamson wrote “GASBombed, The accounting-standards board is about to nuke state and local budgets — and it’s about time.” May 15, 2012
http://bit.ly/LlE3a2
Allowing these companies to assume those rates only inflates their profit statements temporarily.
Toms assumption that low interest rates will not continue is false.
There is evidence to suggest that low interest rate scenario has credence and the diehard capitalist system is going into unknown territory.
The change in the reference rate I believe is a good change, as the current rate environment will not be sustained. The concept of maturity matching, a concept from the Corporate Finance, Banking and Risk Management worlds is well understood, and sound. Matching long term liabilities with short term assets is not.
So on one hand, with the stroke of the pen, many pension plans will go from appearing underfunded to appearing healthy. But at the same time, the result will be that companies will be required to contribute less to the plans than they had to, so it actually stands to make the plans even less healthy in reality while they appear just fine.
Glad to see that the other commenters are seeing from this perspective - i don't know why the person that wrote this current is celebrating this.
You are correct in every instance. The pensions reset is political b.s. at it's finest.
Using the rate over the last two years makes little sense given the FEDS actions that have distorted the rate.