Statement of Senator Michael B. Enzi
Committee on Banking, Housing and Urban Affairs
FASB’s Proposed Standard on "Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans"
June 14, 2006
Mr. Chairman, Thank you very much for holding this hearing today on revising our nation’s accounting standards for pension plans and retirement health benefits and their convergence with international accounting standards. This hearing is timely as we approach the retirement of the baby boomer generation. Day after day newspaper headlines are filled with stories of large and small companies struggling with legacy costs especially in the retirement benefits area.
After his last appearance before the Banking Committee a couple of years ago, Sir David Tweedie and I had the opportunity to meet in the Committee’s anteroom. The original topic of discussion was intended to be about the use of stock option grants in the United States and in Europe. However the topic quickly changed to a discussion on accounting standards for retirement benefits.
At that time, both of us had agreed that accounting for retirement benefits was one of bigger challenges for the accounting industry. We both thought the issue dwarfed the issue of stock options.
Sir Tweedie spoke of his experience with companies in legacy industries and the U.K.’s pension turmoil. We both recognized that the problem was looming over the horizon in the United States. Little did we know how correct we would be.
Mr. Chairman, as you know, last year I took over the Chairmanship of the Committee on Health, Education, Labor, and Pensions. One of my first orders of business was to begin drafting legislation to revise our pension laws under ERISA to ensure that defined benefit pension plans are fully funded and do not become a burden upon the PBGC. Currently, we have convened a Conference Committee with the House to resolve the differences between our two bills.
While the pension accounting pursuant to the funding rules for ERISA and the Tax Code are much different than GAAP accounting, there are vital lessons to be learned.
FASB is making the right decision to update retirement benefits accounting standards at this time. The current standards do not accurately tell the story of the true cost or liability a company may owe for future obligations. The first stage may appear to be a modest change but even a modest change in this volatile area can be significant. The real work will come when FASB engages on Phase 2 of its initiative to look at the methodologies behind the numbers.
Today, we are on the verge of an evolution in our pension and retirement health care system. Companies are making the decision to no longer provide defined benefit plans and retirement health care due to escalating costs. In addition, study after study shows that Americans in general do not have enough money to live out our golden years.
As FASB and the IASB consider changes to accounting rules, I would offer them guidance to do so in a manner that will not cause companies to immediately drop retirement benefits. Any significant change must be done with sufficient transition periods in place and time for companies to adjust and to plan ahead. Our employees’ retirement benefits are too important not to take the time to get this right the first time. Mr. Chairman, as this is a hearing on accounting standards I would just like to add a comment on the recent revelations of manipulation in the marketplace on stock options. If there can be good news out of this it is that it appears that the back dating scandal appears to have happened before the implementation of the Sarbanes Oxley Act. Thankfully, provisions in the Act require much faster disclosure of executives who exercise stock option rights. This and vigilant oversight by the SEC should put an end to this.
However, I am very disturbed by the Enron-type shenanigans that appear to have gone on with stock option back dating. This is just another lesson that the manipulation of accounting standards is wrong. It is criminal, and those who are manipulating the markets should be punished.
When we discussed stock options and accounting a couple of years ago, the discussion I brought to the table was about entrepreneurship and broad-based employee stock option plans. I still believe that companies should have these tools available to them. Legislation introduced would have immediately expensed and disclosed executive stock options. Executives should not be permitted to manipulate executive stock options to the detriment of employees and to shareholders. I fully support Chairman Cox and the SEC Enforcement Division to crack down on this abusive practice.
Mr. Chairman, thank you again for holding this hearing.