<nobr>May 23, 2003</nobr>

ERIC Tells FASB to Drop Accounting Rule that Would Inflate Balance Sheet Liabilities for Cash Balance Plans

Washington, DC - ERIC today called on the Financial Accounting Standards Board (FASB) to abandon a hastily crafted accounting proposal that would sharply increase liabilities for many cash balance pension plans on a corporate financial statement. In a letter to FASB, ERIC estimated that FASB’s proposal to change the discount interest rate used to value certain cash balance plans to a more conservative rate would, in some cases, increase plan liabilities by 20 to 40 percent. The proposal was advanced without any notice, comment period or discussion.

ERIC's letter urged FASB not to address the discount rate issue at this time maintaining that the organization “should not make a decision of this magnitude without giving all interested parties, including the employers that sponsor cash balance plans, an opportunity to submit comments on the issue. By giving the public adequate advance notice and an opportunity to comment, FASB will be able to assure that this issue receives the thorough attention and analysis it deserves.”

Under the proposal, FASB would change the discount rate used to value the liabilities under cash balance plans that credit participants’ accounts with a market-related interest rate (e.g. a Treasury bond rate). For these plans, FASB would require that the plan’s liabilities must be valued using that same interest rate. Currently, the liabilities under defined benefit plans are calculated using a discount rate based on the yields for high-quality, long-term corporate bonds

The proposal was introduced by FASB’s Emerging Issues Task Force (EITF) at a May 15th meeting and is scheduled for consideration by the Board on May 28th. The EITF also affirmed at its meeting that cash balance plans should be accounted for as defined benefit plans and concluded that the traditional unit credit method is the appropriate attribution method under SFAS 87. These were the issues that the EITF had been asked to address. The EITF had not been asked to address the discount rate issue.

A copy of the ERIC letter can be found at: http://www.eric.org/forms/uploadFiles/2BE900000002.filename.FASB_letter_re_cash_balance_rates.pdf

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