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Accounting For Pensions: The “Real” Problem
The current funding problems of pension plans are primarily a by-product of historically low interest rates (although the falling stock market has been a factor, it has not been the primary force). Those that state that the unrealistic return rates used in pension accounting create hugely under-funded pensions are incorrect. Why you ask? The answer is quite simple. Expected returns play no part in the determination of over or under funded status of pension plans. In fact, being under-funded will not necessarily send a company to its earnings or cash flow in a desperate attempt to close the “gap” and become fully or over-funded. Looking at a company’s over or under-funded status will only give you half the picture. In order to find companies that will actually be forced to contribute cash to their pension funds, it is necessary to look at something called the “funding ratio”.