Pension challenges looming

NEW YORK – The pension system is heading for a crisis, or maybe two.

The first is the most worrisome for workers: Too many pension plans aren’t adequately funded or are already in default. The companies in the Standard & Poor’s 500 with traditional pension plans need to put aside another $40 billion this year to fully fund the plans, according to S&P.

The second impending crisis is an accounting change that may make pension issues more painful for corporations. Regulations for both pensions and retiree health-care costs are poised to change in the next five years, possibly the largest accounting rules shift in decades.

The Financial Accounting and Standards Board has said it will require companies to add their net pension and retiree health-care costs to their balance sheets within the next year. Then, over the next three or more years, the accounting methods for pensions and retiree health-care costs will also change.

The first change, which will move pension and retiree health-care costs from financial footnotes to balance sheets, could be dramatic, increasing companies’ leverage and changing computed returns, book value and shareholder equity ratios. These ratios are key – many loans and bonds deals cap a company’s leverage ratio. The changes could be eye-popping. The aggregate drop in shareholder equity, for instance, will be 10 percent, a Standard & Poor’s analyst wrote in December.