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Jan 21
2011

Verizon, AT&T change pension accounting

Posted by Stephen Taub in Verizon Communicationsother post-employment benefitsnon cash chargecash flowCashAccounting

Stephen Taub

Verizon Communications has changed the way its accounts for pensions and other post-employment benefits.

The telecom giant said the new policy recognizes gains and losses in the year they are incurred, rather than amortizing them over time. This will result in $20.2 billion in charges to prior earnings.

The company stresses that annual adjustments will be made to reflect the actual return on pension plan assets, changes in discount rates and differences from other actuarial assumptions.

The move, which follows AT&T's lead last week, will not affect cash flow or pension funding requirements or Verizon's pension or other post-employment benefits (OPEB) liability.

Verizon said it will take pre-tax charges of $600 million for 2010.  This is due primarily to a lower discount rate, partially offset by a return on assets that was higher than expected, and favorable health care trends and other costs.

The company lowered its assumed discount rate, from 6.25 percent at the end of 2009 to 5.75 percent for purposes of determining its pension and OPEB liability.  This change increased the liability by $2.9 billion in 2010, the company said.

Verizon also estimated its return on pension assets in 2010 was 14 percent, well above its assumption of 8.5 percent, resulting in an actuarial gain of about $1 billion.

It also noted that health care and other retiree benefit costs were favorable compared to assumptions, resulting in a $1.3 billion reduction in liabilities.

For 2011, the company said it has lowered its return on pension assets assumption from 8.5 percent to 8 percent.

Last week, AT&T said it would take a noncash charge of about $2.7 billion as a result of changing its way of accounting for gains and losses for pension and other postretirement benefits to the year in which they are incurred.

The telecom company said it will book service costs, interest costs and expected return on assets on a quarterly basis, with an annual adjustment taken each fourth quarter to reflect actual return on assets, changes in discount rates and other actuarial assumptions.

"AT&T expects the change to a market-based approach will result in simpler, more transparent financial results by linking results directly to current market returns, interest rates and health care costs," it said in its announcement, stressing the change will not impact its cash flow or pension funding requirements.

AT&T said the charge is driven by a reduction in the benefit plan discount rate from 6.5 percent to 5.8 percent, partially offset by higher-than-expected returns on benefit plan assets and favorable health care cost trends in 2010.

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