Report to the Ranking Minority 

Member, Committee on Education 

and the Workforce, House of 

Representatives 

GAO

March 2004 PRIVATE PENSIONS

Publicly Available 

Reports Provide 

Useful but Limited 

Information on Plans’ 

Financial Condition 

GAO-04-395 

United States General Accounting Office 
www.gao.gov/cgi-bin/getrpt?GAO-04-395.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Barbara 

Bovbjerg at (202) 512-7215 or 

bovbjergb@gao.gov. 

Highlights of GAO-04-395, a report to the 

Ranking Minority Member, Committee on 

Education and the Workforce, House of 

Representatives 

March 2004

PRIVATE PENSIONS

Publicly Available Reports Provide Useful 

but Limited Information on Plans’ 

Financial Condition 

Information about defined benefit pension plans in regulatory reports and 

pension information in corporate financial statements serve different 

purposes and provide different information. The regulatory report focuses, 

in part, on the funding needs of each pension plan. In contrast, corporate 

financial statements show the aggregate effect of all of a company’s pension 

plans on its overall financial position and performance. The two sources may 

also differ in the rates assumed for investment returns on pension assets and 

in how these rates are used. As a result of these differences, the information 

available from the two sources can appear to be inconsistent or 

contradictory, as evidenced by the graph below. 

Both sources of information have limitations in the extent to which they 

meet certain needs of their users. Under current reporting requirements, 

regulatory reports are not timely and do not provide information about 

whether benefits would all be paid were the plan to be terminated. Financial 

statements can supplement regulatory report data because they are timelier 

and provide insights into the probability of a company meeting its future 

pension obligations. However, through December 2003, financial statements 

have lacked two disclosures important to investors—allocation of pension 

assets and estimates of future contributions to plans. There is also debate 

about whether current methods for calculating pension expense accurately 

represent the effect of pension plans on a company’s operations. 

Several changes have been made or proposed to provide further information. 

In July 2003, the administration called for public disclosure of more 

information about the sufficiency of a plan’s assets. However, no further 

steps have yet been taken. For financial statements, the Financial 

Accounting Standards Board issued a revised standard in December 2003 

requiring enhanced pension disclosures, such as pension asset allocation 

and expected contributions to plans. Internationally, accounting standards 

boards have considered proposals to change the methodology for calculating 

pension expense. We have previously recommended changes to improve the 

transparency of plan financial information, but other challenges remain. 

Plan participants and regulators continue to need more timely information, 

including measures of plan funding in the event of plan termination. 

0

5

10

15

20

Billions of dollars

Source: GAO analysis.

Financial Statement Data Regulatory Report Data

Assets Liabilities Assets Liabilities

Information about the financial 

condition of defined benefit 

pension plans is provided in two 

sources: regulatory reports to the 

government and corporate 

financial statements. The two 

sources can often appear to 

provide contradictory information. 

For example, when pension asset 

values declined for most large 

companies between 2000 and 2002, 

these companies all continued to 

report positive returns on pension 

assets in their financial statement 

calculations of pension expense. 

This apparent inconsistency, 

coupled with disclosures about 

corporate accounting scandals and 

news of failing pension plans, has 

raised questions about the 

accuracy and transparency of 

available information about 

pension plans. GAO was asked to 

explain and describe (1) key 

differences between the two 

publicly available sources of 

information; (2) the limitations of 

information about the financial 

condition of defined benefit plans 

from these two sources; and (3) 

recent or proposed changes to 

pension reporting, including 

selected approaches to pension 

reporting used in other countries. 
Page i GAO-04-395 Private Pensions 

Letter 1

Results in Brief 3

Background 4

Form 5500 Reports and Corporate Financial Statements Differ in 

Key Respects 9

Both Reports Provide Complementary Pension Information but Do 

Not Fully Satisfy Users 16

Changes to Pension Accounting and Regulatory Reporting Have 

Been Implemented or Proposed 27

Concluding Observations 29

Agency Comments 30

Appendix I Scope and Methodology 32 

Appendix II Expected and Actual Returns in Financial 

Statements 36 

Appendix III GAO Contacts and Staff Acknowledgments 42 

Contacts 42

Staff Acknowledgments 42

Tables 

Table 1: Differences in Measures of Pension Assets and Liabilities 

in Reports 11

Table 2: Comparison of Pension Assets with Liabilities for a 

Fortune 500 Company 12

Table 3: Use of Expected Rate of Return in Form 5500 Schedule B 

and Corporate Financial Statements 13

Table 4: Average Expected and Actual Rates of Return on Pension 

Assets from 1994 to 2002 for a Sample of Fortune 500 

Companies 24

Table 5: Corporate Financial Statement Example—Elements of 

Pension Footnote and Statement of Operations for 

Company X for Different Expected Rates of Return 37

Table 6: Definitions of Pension Footnote Items in Table 5 39

Contents 
Page ii GAO-04-395 Private Pensions 

Figure 

Figure 1: Comparison of Average Expected Rates of Return 

Reported in Form 5500 Schedule B and Corporate 

Financial Statements for a Sample of Fortune 500 

Companies 16

Abbreviations

DOL Department of Labor 

EDGAR Electronic Data Gathering, Analysis, and Retrieval System 

EIN employer identification number 

ERISA Employee Retirement Income Security Act of 1974 

FASB Financial Accounting Standards Board 

IASB International Accounting Standards Board 

IRS Internal Revenue Service 

PBGC Pension Benefit Guaranty Corporation 

SEC Securities and Exchange Commission 

S&P Standard and Poor’s 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

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other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
Page 1 GAO-04-395 Private Pensions 

March 31, 2004 

The Honorable George Miller 

Ranking Minority Member 

Committee on Education and the Workforce 

House of Representatives 

Dear Congressman Miller: 

Since the stock market decline of 2000 through 2002, policy makers and 

pension plan participants have raised concerns about where they can 

obtain clear and timely information about the financial condition of 

defined benefit pension plans. Defined benefit plans, which promise their 

participants a steady retirement income, usually based on years of service 

and salary, tend to invest most of their assets in the stock market. These 

plans cover some 44 million workers and retirees, concentrated in 

industries such as automotive, airline, steel, telecommunications, and 

manufacturing. The companies that sponsor defined benefit plans bear the 

risks of investing these assets, and may be required to contribute money to 

the plans if the plans’ asset values are less than certain measurements of 

the benefits promised to plan participants as defined by law. When several 

of these plans reported funding problems or were terminated in the wake 

of the stock market’s decline, policy makers, pension participants, 

investors, and financial analysts alike began taking a closer look at the 

health of defined benefit pension plans. The information they found often 

appeared contradictory. For example, while the stock market was falling 

and some information indicated that the value of companies’ pension 

assets was declining, other information implied that these same assets 

were increasing in value. In fact, publicly reported values of pension plan 

assets and liabilities were routinely contradictory. Coupled with news of 

corporate accounting scandals, these apparent contradictions have raised 

questions about the accuracy and transparency of available information 

about pension plans. 

As you requested, this report examines the two main sources of financial 

information about defined benefit pension plans and analyzes why these 

sources generate different measures of the financial condition of these 

plans. The first source is a report, commonly referred to as the Form 5500, 

which plan sponsors are required to file each year with the agencies that 

administer federal pension laws. Part of the Form 5500 report, called 

Schedule B, provides actuarial and other information about a pension 

United States General Accounting Office 

Washington, DC 20548 
Page 2 GAO-04-395 Private Pensions 

plan’s assets, liabilities, actuarial assumptions, and employer 

contributions.1

 The second source is a company’s annual financial 

statements, which among other information provide pension-related data 

as they pertain to a company’s overall financial position, performance, and 

cash flows. This report explains and describes 

• key differences between the two publicly available sources of information, 

including their methodologies and assumptions; 

• certain limitations of the information about the financial condition of 

defined benefit plans in these two information sources; and 

• recent or proposed changes to pension reporting, including selected 

approaches to pension reporting in other countries. 

For our analysis of how information in the Form 5500 is used, we reviewed 

the laws that require the filing of regulatory reports on pensions and 

interviewed pension actuaries and officials from federal agencies that use 

this information. As a basis for our analyses of the information about 

pension plans presented in corporate financial statements, we reviewed 

relevant accounting standards from the Financial Accounting Standards 

Board (FASB), which establishes standards of financial accounting and 

reporting for nongovernmental entities, and interviewed board officials. 

We also interviewed expert users of pension information in financial 

statements, including financial analysts, credit rating agency officials, 

pension actuaries, and federal officials. These experts described and 

shared documentation about how they use financial statements to 

understand the financial position of pension plans and the impact of 

pension plans on companies’ financial performance and cash flows. To 

identify approaches used in other countries and proposals for pension 

reporting in this country, we relied extensively on statements provided by 

officials at the International Accounting Standards Board and the 

Financial Accounting Standards Board. Our work also included analysis of 

Form 5500 filings and corporate financial statements for a systematic 

random sample of 97 publicly traded Fortune 500 companies with defined 

benefit pension plans. Appendix I explains the scope and methodology of 

our work in greater detail. We conducted our work between January 2003 

and January 2004 in accordance with generally accepted government 

auditing standards. 

 1

References to pension plan asset and liability values in Form 5500 throughout this report 

reflect information provided in Schedule B. 
Page 3 GAO-04-395 Private Pensions 

The information in a pension plan’s Form 5500 report serves a 

substantially different purpose from the pension information disclosed in a 

corporate financial statement; therefore, these two reports do not provide 

the same measures of pension funding. As required by law, the Form 5500 

requires, among other things, plan financial information including 

measures of assets, liabilities, and an estimated rate of return on plan 

assets. One purpose of this information is to determine whether plans are 

funded in accordance with statutory requirements. In contrast, as required 

by financial accounting standards, the pension information in corporate 

financial statements is intended to explain how a company’s pension 

plans, in aggregate, affect its overall financial position, performance, and 

cash flows, and is not intended to measure pension funding needs. The 

different purposes and reporting requirements lead to differences in how 

the pension information is developed and presented. Basic methodological 

steps—such as whether calculations are based on values at the beginning 

or the end of the year—can vary substantially between the two sources. 

For example, one company in our sample based its Form 5500 filing on 

plan assets valued on June 30, 2001, while its financial statement was 

based on values for December 31 of the same year, contributing to a 

difference of almost $600 million in reported assets. Additionally, both 

sources use a rate-of-return estimate, but they apply this estimate 

differently. As a result of the different purposes and reporting 

requirements, the information available from the two sources can appear 

to be inconsistent or contradictory. 

Under current reporting requirements, information in both the Form 5500 

and corporate financial statements has limitations in the extent to which it 

meets certain needs of regulators, plan participants, and investors. The 

Form 5500 provides detailed information about individual defined benefit 

plans, but this information is limited in two main ways. The first limitation 

is timeliness: Pension funding data are 1 to 2 years old by the time the 

Form 5500 is filed with cognizant federal agencies. However, current 

statutory reporting requirements provide little flexibility to improve the 

timeliness of Form 5500 reporting. The second limitation is that the form 

does not require information about whether plans have sufficient assets to 

meet their obligations in the event of the plan’s termination. The 

information in corporate financial statements can help regulators and 

others supplement available Form 5500 data because it is more timely and 

can provide insights into whether a company is likely to meet its future 

pension obligations. According to financial analysts we spoke with, 

corporate financial statements have heretofore lacked two important 

disclosures—the composition of pension assets and an estimate of the 

amount a company is likely to contribute to its pensions for the coming 

Results in Brief 
Page 4 GAO-04-395 Private Pensions 

year. In addition, some analysts are concerned that accounting methods 

designed to smooth out asset values’ year-to-year fluctuations in favor of 

reporting longer-term trends do not really reflect the effect that significant 

fluctuations may have on the operations of the plan sponsor. However, 

others argue that current pension accounting standards are appropriate 

for reflecting the long-term nature of pension obligations. 

Several changes have been made or proposed to provide additional 

information about the financial condition of defined benefit plans. In an 

effort to improve the transparency of pension plan information, the 

administration proposed in July 2003 that additional information be made 

available to the public about plans’ financial condition. This information, 

which until now has been available only to government regulators under 

certain conditions, includes computations that provide a more accurate 

picture of a plan’s ability to meet its obligations if it were to be terminated, 

as well as more detailed information about plans when companies’ 

pensions are collectively underfunded by at least $50 million. As of March 

2004, no action has yet been taken on the administration’s proposal. For 

financial statements, the Financial Accounting Standards Board in 

December 2003 issued a revised accounting standard requiring disclosure 

of more information, such as the allocation of plan assets and the 

company’s expected pension plan contributions in the upcoming year. 

Outside the United States, accounting standards boards have been 

considering proposals that would change the methodology for calculating 

pension cost. We have previously recommended changes to improve the 

transparency of plan financial information, but other challenges remain. 

Plan participants, regulators, policy makers, and investors continue to 

need more timely information, including measures of plan funding in the 

event of plan termination. 

Once the most prevalent type of pension plan, defined benefit plans no 

longer predominate, but they still constitute a significant part of the 

nation’s retirement landscape. They usually base retirement income on 

salary and years of service (for example, a benefit of 1.5 percent of an 

employee’s highest annual salary multiplied by the number of years of 

service) and are one of two pension types. The other type of pension, 

called a defined contribution plan, bases benefits on contributions to, and 

investment returns on, individual investment accounts. Among workers 

covered by pensions in 1998, about 56 percent were covered only by 

Background 
Page 5 GAO-04-395 Private Pensions 

defined contribution plans (including 401(k)2 plans), compared with about 

14 percent who were covered only by defined benefit plans, and about 30 

percent who were covered by both types of plans.3

Under a defined benefit plan, the employer is responsible for funding the 

benefit, investing and managing plan assets, and bearing the investment 

risk.4

 To fund their defined benefit pension plans, companies set up 

dedicated trust funds from which they cannot remove assets without 

incurring significant tax penalties. To promote the security of participants’ 

benefits, the Employee Retirement Income Security Act of 1974 (ERISA), 

among other requirements, sets minimum pension funding standards. 

These funding standards establish the minimum amounts that defined 

benefit plan sponsors must contribute in each year to help ensure that 

their plans have sufficient assets to pay benefits when due. If plan asset 

values fall below the minimum funding targets, employers may have to 

make additional contributions. 

The financial stability of defined benefit pension plans is of interest not 

only to workers whose retirement incomes depend on the plan, but also to 

the cognizant federal agencies and to investors in the companies that 

sponsor the plans. Federal policy encourages employers to establish and 

maintain pension plans for their employees by providing preferential tax 

treatment under the Internal Revenue Code for plans that meet applicable 

requirements. ERISA established a federally chartered organization, the 

Pension Benefit Guaranty Corporation (PBGC), to insure private sector 

defined benefit pension plans, subject to certain limits, in the event that a 

 2

A 401(k) plan generally allows participants to make contributions that are not taxed until 

the funds are used. Earnings on these contributions likewise accumulate tax-free until the 

funds are used. 

3

Private Pension Plan Bulletin: Abstract of 1998 Form 5500 Annual Reports, U.S. 

Department of Labor Pension and Welfare Benefits Administration, Number 11 

(Washington, D.C.: Winter 2001-2002). 

4

In contrast, under a defined contribution plan, the employee bears the investment risk. 

Hybrid plans, such as cash balance plans, are defined benefit plans, which combine some 

of the characteristics of defined contribution plans. The characteristics of these various 

types of plans are explained more fully in our publication Answers to Key Questions about 

Private Pension Plans, GAO-02-745SP (Washington, D.C.: September 2002), pp. 22-24. 
Page 6 GAO-04-395 Private Pensions 

plan sponsor cannot meet its pension obligations.5 As part of its role as an 

insurer, PBGC monitors the financial solvency of those plans and plan 

sponsors that may present a risk of loss to plan participants and the PBGC. 

We recently designated PBGC’s single-employer insurance program as 

high-risk because of its current financial weaknesses,6

 as well as the 

serious, long-term risks to the program’s future viability.7

 Investors’ 

interest in pension plans is prompted by the fact that a company’s pension 

plans represent a claim on its current and future resources—and therefore 

potentially on its ability to pay dividends or invest in production and 

business growth. Thus, all three groups—regulators, participants, and 

investors—need information about these plans. 

To meet the information needs of the federal agencies that administer 

federal pension laws, ERISA and the Internal Revenue Code require the 

filing of an annual report, which includes financial and actuarial 

information about each plan.8

 The PBGC, the Department of Labor, and 

the Internal Revenue Service (IRS) jointly develop the Form 5500, Annual 

Return/Report of Employee Benefit Plan, to be used by plan 

administrators to meet their annual reporting obligations under ERISA and 

the Internal Revenue Code.9

 Plan administrators of private sector pension 

 5

PBGC receives no direct federal tax dollars to support this insurance program; rather it is 

funded by premiums paid by the corporate sponsors of defined benefit plans insured by 

PBGC. The program receives the assets of terminated underfunded plans and any of the 

sponsor’s assets that PBGC recovers during bankruptcy proceedings. PBGC finances the 

unfunded liabilities of terminated plans with (1) premiums paid by plan sponsors and 

(2) income earned from the investment of program assets. 

6

On January 15, 2004, PBGC released its fiscal year 2003 financial results and reported a 

current deficit of $11.2 billion for the single-employer insurance program. 

7

See U.S. General Accounting Office, Pension Benefit Guaranty Corporation SingleEmployer Insurance Program: Long-Term Vulnerabilities Warrant “High-Risk” 

Designation, GAO-03-1050SP (Washington, D.C.: July 23, 2003). 

8

ERISA sections 103 and 104 of Title I and Internal Revenue Code sections 6057, 6058, and 

6059 provide the statutory authority for the filing of an annual return/report, which 

includes financial information pertaining to the plan. 

9

The Internal Revenue Service enforces standards that relate to such matters as how 

employees become eligible to participate in benefit plans, how they become eligible to earn 

rights to benefits, and how much, at a minimum, employers must contribute. The 

Department of Labor enforces ERISA’s reporting and disclosure provisions and fiduciary 

responsibility standards, which among other things concern the type and extent of 

information provided to the federal government and plan participants and how pension 

plans are operated in the interests of plan participants. 
Page 7 GAO-04-395 Private Pensions 

and welfare plans are generally required to file a Form 5500 each year.10

The filing includes a short document for identification purposes and 

general information, plus a series of separate statements and schedules 

(attachments) that are filed as they pertain to each type of benefit plan. 

This form and its statements and schedules are used to collect detailed 

plan information about assets, liabilities, insurance, and financial 

transactions, plus financial statements audited by an independent qualified 

public accountant, and for defined benefit plans, an actuarial statement.11

More than 1 million of the forms are filed annually, of which 

approximately 32,000 represent defined benefit pension plans insured by 

PBGC. The information on the form is made available to plan participants 

upon request and serves as the basis for a summary annual report 

provided to plan participants and their beneficiaries. 

One part of the Form 5500 filing, called Schedule B, includes information 

about a defined benefit pension plan’s assets, liabilities, actuarial 

assumptions, and employer contributions. The various measures of plan 

assets and liabilities are required by ERISA and the Internal Revenue Code 

to determine whether plans are funded according to the statutory 

requirements. Specifically, under Schedule B, IRS requires, among other 

things, the disclosure of assets and liabilities and an expected rate of 

return, which is called the valuation liability interest rate. IRS reviews this 

information to ensure compliance with the minimum funding requirements 

for pension plans. In addition, according to PBGC officials, PBGC may use 

Schedule B information to help them identify plans that may be in 

financial distress and thus represent a risk to the insurance program and 

plan participants. Some plan sponsors also use information in the 

Schedule B to calculate certain insurance premiums they pay to PBGC. 

In addition to the annual reporting requirement, PBGC has authority to 

require plans to provide the agency with detailed financial information. 

Specifically, if a company’s pension plans reach a certain level of 

underfunding in aggregate, ERISA requires the company to provide 

information to PBGC in what is called a 4010 filing. The 4010 filing 

 10The Department of Labor has issued regulations exempting certain pension and welfare 

plans from the requirement to file a Form 5500 based on size and type of plan. Welfare 

plans provide participants and their beneficiaries various nonpension benefits such as for 

health care, unemployment, disability, training programs, and legal services. Welfare plans 

are not subject to the same funding requirements as pension plans. 

11For plans with fewer than 100 participants the agencies have developed simplified 

reporting requirements that do not include audited financial statements. 
Page 8 GAO-04-395 Private Pensions 

includes proprietary information about the plan sponsor, its total pension 

assets, and its total benefit obligations were the company to terminate its 

pension plans immediately. However, under current law, PBGC is not 

permitted to disclose this information to the public. 

The Securities Exchange Act of 1934 requires publicly traded corporations 

to annually file a 10-K report, which is often referred to as the corporate 

financial statement, with shareholders and the Securities and Exchange 

Commission (SEC). The SEC uses 10-K reports to ensure that companies 

are meeting disclosure requirements so that investors can make informed 

investment decisions. The 10-K report describes the business, finances, 

and management of a corporation. For companies whose defined benefit 

pension plans are material to their financial statements, accounting 

standards require a footnote to the financial statements that details the 

cost, cash flows, assets, and liabilities associated with these plans. 

Footnote disclosures provide more detailed information about data 

presented in the company’s financial statements.12 Standards for reporting 

this information are set by the Financial Accounting Standards Board.13

Actuaries estimate the present value of pension liabilities using economic 

and demographic assumptions. These assumptions are needed to estimate 

the amount of money required now and in the future to meet a pension 

plan’s future benefit obligation. Economic assumptions include rates of 

inflation, returns on investments, and salary growth rates. Demographic 

assumptions include changes in the workforce from retirement, death, and 

other service terminations. Most actuarial assumptions for measuring 

pension plan funding are not specifically prescribed by law or subject to 

advance approval from the IRS or any other government agency. However, 

 12The statement of earnings and comprehensive income measures profitability of the 

company by showing the income earned and expenses incurred during the year. 

Comprehensive income would include accounting adjustments and holding gains and 

losses for certain securities and investments. The statement of financial position provides 

information about a company’s assets, liabilities, and equity and their relationships to one 

another at the end of the company’s fiscal year. The statement of cash flows reflects a 

company’s major sources of cash receipts and its major uses of cash. The statement of 

stockholder’s equity reflects the company’s transactions during the year related to capital 

contributions and distributions to company stockholders. 

13FASB’s mission is to establish and improve standards of financial accounting and 

reporting for the guidance and education of the public, including issuers, auditors, and 

users of financial information. FASB, which is part of a structure that is independent of all 

other business and professional organizations, develops broad accounting concepts, 

standards for financial reporting, and guidance on how to implement the standards. 
Page 9 GAO-04-395 Private Pensions 

ERISA requires the plan actuary to select assumptions that are individually 

reasonable and represent the actuary’s “best estimate of anticipated 

experience under the plan.”14

The pension plan financial information reported in Form 5500 Schedule B 

serves a different purpose from the pension information disclosed in 

corporate financial statements. The information in each source is subject 

to different reporting requirements; therefore, measurements of pension 

funding are unlikely to be the same in the two reports. Government 

regulators and others use Form 5500 information for many purposes, 

including to determine whether plans are meeting minimum funding 

requirements and required contributions for each defined benefit plan that 

a company sponsors, while financial analysts and investors use pension 

information in corporate financial statements to determine how the 

company’s plans in aggregate affect its overall financial position, 

performance, and cash flows. Because of their different purposes and 

reporting requirements, these two sources use different measures and 

assumptions to generate information. For example, in providing 

information about the values of their pension assets and the present value 

of their future pension obligations, the Form 5500 and the corporate 

financial statements often base their valuations at different points in time 

and use different methods of calculation. Both of these reports also 

include an assumption about rates of return on the investment of pension 

assets. However, these rates may differ, and this assumption serves a 

different purpose in each report. As a result of such differences, 

information in the two reports is generally not similar, and because the 

two sources of information use similar terminology—for example, both 

refer to asset values and investment returns—the results can appear 

contradictory. 

One objective of the Form 5500 is to provide financial and other 

information about the operations of an individual employee benefit plan. 

For defined benefit pension plans, the Form 5500 Schedule B provides 

measures of plan assets and liabilities; actuarial information, such as 

economic assumptions and demographic assumptions about plan 

participants; and information about how much the plan sponsor is 

contributing to meet ERISA funding requirements. If a company sponsors 

more than one plan, it must file a Form 5500 for each plan. While analysts 

 14ERISA Section 103(a)(4)(B). 

Form 5500 Reports 

and Corporate 

Financial Statements 

Differ in Key Respects 

Form 5500 Reports and 

Corporate Financial 

Statements Serve Different 

Purposes 
Page 10 GAO-04-395 Private Pensions 

and investors may use this information, it is primarily used by federal 

regulators to measure plan funding and ensure compliance with applicable 

laws and regulations. 

The pension information in a company’s financial statement, by contrast, 

primarily serves a different purpose. The financial statement is intended to 

provide financial and other information about a company’s consolidated 

operational performance as measured primarily by earnings. In this 

context, pension information is mostly provided in a footnote to give 

financial statement users information about the status of an employer’s 

pension plans and the plans’ effect on the employer’s financial position 

and profitability. For example, certain details about the company’s annual 

cost of providing pension benefits are presented in the pension footnote 

disclosure because this cost, or expense, affects the company’s 

profitability. The users of corporate financial statements are primarily 

financial analysts and investors who are trying to assess the company’s 

financial condition, profitability, and cash flows, and whose concern is not 

so much the financial condition of individual pension plans but the effect 

that the company’s pension obligations may have on its future cash flows 

and profitability. 

Even where the Form 5500 and corporate financial statements provide 

similar types of information, such as pension assets and liabilities, their 

values usually differ. Among the key reasons for this are different dates of 

measurement, different definitions of reporting entity, different 

methodologies for determining costs of benefits, and different methods of 

measuring assets and liabilities. Table 1 summarizes some of the 

differences. 

Measures of Pension 

Assets and Liabilities 

Differ in Form 5500 

Reports and Corporate 

Financial Statements 
Page 11 GAO-04-395 Private Pensions 

Table 1: Differences in Measures of Pension Assets and Liabilities in Reports 

 Form 5500 Schedule B Corporate financial statement Significance 

Measurement dates May be any day during the plan 

year. Large companies typically 

use the first day of the plan year, 

while many small companies use 

the last day. Plan years normally 

run concurrently with the 

company’s fiscal year. 

The last day of the plan sponsor’s 

fiscal year or, if used consistently, 

a date not more than 3 months 

prior to the end of the fiscal year. 

The use of different dates 

generally results in different 

asset and liability values as 

asset prices fluctuate and, with 

the passage of time, additional 

liabilities accrue. 

Number of plans covered in 

report 

One form is filed for each 

qualifying plan sponsored by a 

company. 

Regardless of number of plans 

sponsored by a company, total 

pension assets and liabilities are 

generally reported in aggregate 

for all plans, including those not 

required to file a Form 5500 (e.g., 

plans for employees overseas). 

A company may sponsor 

multiple plans that have different 

benefit provisions and are 

funded at different levels. These 

potential differences may be 

masked by the aggregation of 

data. 

Method of determining 

annual cost of benefits 

ERISA allows companies to 

choose one of six different 

methods. 

Accounting standards mandate a 

single method of measuring the 

annual cost of benefits earned. 

This method is one of the six 

allowed in Form 5500. 

Methods for spreading out the 

cost of benefits over the working 

life of employees may differ, 

resulting in different measures of 

cost and obligations each year. 

Method of calculating asset 

and liability values 

Assets are valued on an actuarial 

basis, and liabilities are reported 

two ways: (1) actuarial liability, 

calculated using an interest rate 

selected by the plan actuary, and 

(2) current liability, based on an 

interest rate prescribed by law.a

 

Assets are reported at their fair 

value and liabilities are calculated 

using an interest rate that is 

typically equal to the rate for longterm investment in corporate 

bonds – this rate is typically 

different from the interest rates 

used in Form 5500.b

Actuarial asset values represent 

average asset values over some 

time period while fair values 

reflect asset values at a specific 

time. Using different interest 

rates to calculate present values 

of plan liabilities will yield 

different results. 

Source: GAO analysis. 

a

In calculating current liability for purposes of the funding rules, the Internal Revenue Code requires 

plans to use an interest rate from within a permissible range of rates. See 26 U.S.C. 412(b)(5)(B). 

Plan sponsors may select a rate within 90 to 105 percent of the weighted average interest rate on 

30-year Treasury bond securities during the 4-year period ending on the last day before the beginning 

of the plan year. The top of the permissible range was increased to 120 percent of the weighted 

average rate for 2002 and 2003. The Department of the Treasury does not currently issue 30-year 

securities. As of March 2002, the IRS publishes the average yield on the 30-year Treasury bond 

maturing in February 2031 as a substitute. 

b

The interest rate used to calculate pension liabilities in corporate financial statements should reflect 

the rate at which the benefits could be effectively settled by purchasing a group annuity for plan 

participants. The interest rates used to determine the current prices of annuity contracts and the rates 

of return on high-quality long-term corporate bonds should be considered in developing this discount 

rate assumption. 

These differences in asset and liability measurements can result in 

significantly divergent results for the Form 5500 and the corporate 

financial statements. As an example, table 2 shows the different asset and 

liability values presented in a plan’s Form 5500 filing and in the plan 

sponsor’s corporate financial statements for a Fortune 500 company in 
Page 12 GAO-04-395 Private Pensions 

1999-2001 and the resulting effects on the reported pension funding ratios 

(pension assets divided by pension liabilities). 

Table 2: Comparison of Pension Assets with Liabilities for a Fortune 500 Company 

 Form 5500 Schedule B Corporate financial statement 

Year 

Actuarial asset 

value 

Actuarial 

liability

Actuarial 

asset value

Current 

liability

Fair value of 

company’s 

pension assets

Projected 

benefit 

obligation

1999 $18.081 $11.822 $18.081 $13.883 $21.861 $17.719

Funding ratio 152.9 percent 130.2 percent 123.4 percent

2000 $18.505 $11.008 $18.505 $13.862 $20.314 $17.763

Funding ratio 168.1 percent 133.5 percent 114.4 percent

2001 $17.324 $11.151 $17.324 $14.159 $17.923 $18.769

Funding ratio 155.4 percent 122.4 percent 95.5 percent

Source: GAO analysis. 

Note: Asset and liability values are in billions of dollars. Funding ratios in italics are calculated by 

dividing assets by liabilities. 

One reason for the significant differences in measures of assets and 

liabilities between the Form 5500 and corporate financial statement filings 

in table 2 is that the company sponsors more than one pension plan. When 

companies sponsor multiple pension plans, the details of specific plans are 

generally aggregated in corporate financial statements to show their net 

effect on the plan sponsor and are not intended to provide details about 

the funding of each plan. Thus, the pension information of a sponsor with 

both underfunded and overfunded plans may show little or no funding 

deficiencies, although the consequences to participants in the 

underfunded plans could be quite severe in the event of plan termination. 

One of the most confusing aspects of these two information sources is 

their difference with regard to the expected rate of return on pension 

assets. The expected rate of return is the anticipated long-term average 

investment return on pension assets. The Form 5500 Schedule B and the 

corporate financial statements both use an expected rate of return in 

calculating financial information about pension plans. In this regard, the 

expected rate of return is one of many assumptions, such as inflation and 

mortality rates, that affect a key pension reporting measure. In theory, the 

expected rates of return reported in each source should be similar because 

the assumption is derived from similar, or even the very same, assets. 

However, between these two sources there are differences in the rate’s 

Form 5500 Reports and 

Corporate Financial 

Statements Use Expected 

Rates of Return Differently 
Page 13 GAO-04-395 Private Pensions 

purpose, selection, and method of application that may, in fact, contribute 

to differences between the assumed rates of return used in the two 

sources. Key differences in expected rates of return between the reports 

are shown in table 3. 

Table 3: Use of Expected Rate of Return in Form 5500 Schedule B and Corporate 

Financial Statements 

 Form 5500 Schedule B 

Corporate financial 

statement 

Purpose of expected rate 

of return 

To calculate pension funding. To calculate pension 

expense.a

How is the rate applied? Serves as the interest rate 

used to measure the present 

value of plan liabilities. 

Multiplied by the “marketrelated” value of pension 

assets to obtain a dollar value 

for the expected return on 

pension assets for the year.b

To which plan/plans 

does the rate apply? 

For each individual pension 

plan a rate of return is 

selected. For companies with 

multiple plans, the rate may 

differ from plan to plan 

because of different plan 

provisions and investments. 

A rate is determined for each 

plan. However, only a single 

weighted-average rate is 

reported, regardless of the 

number of plans. 

Who selects rate? Plan actuary, in consultation 

with company management. 

Company management. 

Source: GAO analysis. 

a

Pension expense refers to net periodic pension cost or net periodic pension expense, which is a 

calculated value. We heretofore refer to net periodic pension cost or net periodic pension expense as 

pension expense. 

b

Market-related value is either the fair value of pension assets or an average value of pension assets 

over a period not exceeding 5 years. 

In Form 5500 Schedule B, the expected rate of return is used to calculate 

pension funding—that is, the measurements of pension assets and 

liabilities, which determine whether, and in fact, what amount the 

company needs to contribute to its pension plan to meet the statutory 

minimum funding requirements.15 The expected rate of return is usually 

derived from the pension plan’s investment experience and assumptions 

about long-term rates of return on the different classes of assets held by 

 15There are additional measures of pension funding required by ERISA and the Internal 

Revenue Code, but this measure of pension funding is the first one used to determine 

compliance with pension funding requirements. 
Page 14 GAO-04-395 Private Pensions 

the plan.16 Actuaries calculate a present value of plan liabilities using the 

expected rate of return, which is called the valuation liability interest rate 

on the Form 5500 Schedule B. If plan liabilities exceed assets, the resulting 

difference is used, in part, to determine the amount the company may have 

to contribute to the pension plan for that year. The amount of 

contributions required under the minimum funding rules of the Internal 

Revenue Code is generally the amount needed to fund benefits earned 

during that year plus that year’s portion of other liabilities that are 

amortized over a period of years.17 Amendments to ERISA in 1987 and 1994 

made significant changes to the funding rules, including the establishment 

of a deficit reduction contribution requirement if plan funding is 

inadequate.18 The 1987 amendments to ERISA established the current 

liability measure, which is based on a mandated interest rate rather than a 

rate selected at the discretion of the plan actuary. 

For financial statements, the expected rate of return is used to calculate 

the annual expected investment return on pension assets, which factors 

into the measurement of pension expense. Pension expense represents the 

company’s cost of benefits for the year and generally includes (1) service 

cost—benefits earned by plan participants for a period of service; 

(2) interest cost—increases in the benefit obligation because of the 

passage of time;19 (3) expected returns on pension assets, which offset 

some or all of the net benefit costs; (4) amortization of prior service cost 

resulting from plan amendments; and (5) amortization of gains or losses, if 

any, that may result from changes in assumptions or actual experience 

that differs from assumptions. To calculate a dollar amount for the 

expected return, the expected rate of return is multiplied by the value of 

 16A class of assets is composed of assets that share similar characteristics, such as risks 

and expected rates of return. Examples include equities, corporate bonds, government 

bonds, and real estate. 

17Minimum funding rules permit certain plan liabilities, such as past service liabilities, to be 

amortized over specified time periods. See 26 U.S.C. 412(b)(2)(B). Past service liabilities 

occur when benefits are granted for service before the plan was established or when 

benefit increases after establishment of the plan are made retroactive. 

18See the Omnibus Budget Reconciliation Act of 1987, (P.L. 100-203, Dec. 22, 1987) and 

Retirement Protection Act of 1994 (P.L. 103-465, Dec. 8, 1994). 

19For each additional period of employment (for example, 1 year), active plan participants 

normally earn additional pension benefits, which increase a company’s pension costs. 

Furthermore, as employees get closer to retirement with each passing year, the present 

value of the company’s benefit obligation increases because there is less time available to 

invest pension assets and earn interest on them. 
Page 15 GAO-04-395 Private Pensions 

pension assets.20 This expected return is used instead of the actual return 

on pension assets in the calculation of pension expense, which has the 

effect of smoothing out the volatility of investment returns from year to 

year. Furthermore, if the expected return on plan assets is high enough, a 

company may report a negative pension expense—or pension income. 

Form 5500 reports and, until recently, corporate financial statements have 

not provided specific information about how expected rates of return are 

selected.21 Actuaries told us that they estimate rates of return on the basis 

of several economic forecasting measures and also take into account how 

asset allocations may change in the future based on the demographics of 

plan participants. In contrast, financial analysts and actuaries told us that 

many companies select their expected rates of return on the basis of their 

pension asset returns in past years.22 However, in December 2002 a 

Securities and Exchange Commission staff member publicly stated that 

the SEC would likely review expected rates of return higher than 9 percent 

if the rate was not clearly justified in the company’s financial statement. 

The SEC determined the 9 percent rate on the basis of studies on the 

historical returns on large-company domestic stocks and corporate bonds 

between 1926 and the first three quarters of 2002. According to actuaries 

and financial analysts we spoke with, this statement by the SEC has been a 

primary factor in the selection of lower rates of return in 2002. 

Figure 1 shows the average expected rates of return reported for 1993 to 

2002 by the companies and their pension plans in our sample. 

 20Financial analysts told us that most large companies substitute a “market-related” value 

of pension assets for the reported market value for the purpose of this calculation. See 

example in appendix II. 

21In December 2003 FASB revised its pension disclosure standard, Statement of Financial 

Accounting Standards No. 132, to require a narrative description of the basis used to 

determine the overall long-term expected rate of return on assets assumption. 

22For a Form 5500 filing, ERISA requires an enrolled actuary to certify that all assumptions 

used are individually reasonable and represent the actuary’s “best estimate of anticipated 

experience under the plan.” For corporate financial statements, actuaries told us that they 

provide companies an actuarial report, which states whether the actuary believes the rate 

of return assumption used by company management falls within a reasonable range. The 

company’s independent auditor must separately evaluate the reasonableness of all 

significant assumptions. 
Page 16 GAO-04-395 Private Pensions 

Figure 1: Comparison of Average Expected Rates of Return Reported in Form 5500 

Schedule B and Corporate Financial Statements for a Sample of Fortune 500 

Companies 

Note: Companies in this sample were all listed in the 2003 Fortune 500. Data from Form 5500 reports 

for 2002 were not fully available at the time of this analysis. PBGC analysis of its entire Form 5500 

dataset shows that the average expected rate of return for plans with at least 10,000 participants 

ranged from 8.371 percent in 1994 to 8.473 percent in 2001 before falling to 8.408 percent in 2002 for 

the 80 percent of plans with data available. The number of observations per year for corporate 

financial statements and Form 5500 ranged from 63 to 89 and 61 to 84, respectively. See appendix I 

for further description of the methodology. 

Both the Form 5500 Schedule B and corporate financial statements have 

limitations in the extent to which their required information meets certain 

needs of regulators, plan participants, and some investors. The Form 5500 

takes considerable time for companies to prepare and for federal agencies 

to process, so it is not available to pension plan participants and others on 

a timely basis. The required asset and liability measures in the Form 5500 

Schedule B are used by regulators to monitor compliance with statutory 

funding requirements. However, these funding measures are not intended 

to indicate whether plans have sufficient assets to cover all benefit 

obligations in the event of plan termination. In addition to using the Form 

5500, regulators can also use corporate financial statements to try to 

determine whether a plan sponsor will be able to meet its obligations to its 

pension plans. However, some investors have concerns about whether 

corporate financial statements accurately reflect the effect of pensions on 

plan sponsors. According to financial analysts we spoke with, the pension 

information in corporate financial statements is also limited because it has 

Both Reports Provide 

Complementary 

Pension Information 

but Do Not Fully 

Satisfy Users 

7.50%

0%

7.75%

8.00%

8.25%

8.50%

8.75%

9.00%

9.25%

9.50%

9.75%

10.00%

Average expected rate of return

Source: GAO analysis. 

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Corporate financial statement

Form 5500 Schedule B
Page 17 GAO-04-395 Private Pensions 

not, until recently, included key disclosures, and the methodology used to 

calculate pension expense does not reflect the potential impact of actual 

investment returns on a company’s future cash flows and profitability. 

However, others argue that the current accounting for pension expense is 

appropriate for reflecting the long-term nature of pension obligations and 

their effect on the plan sponsor. 

Information in the Form 5500 is plan-specific and identifies the value of 

assets a plan must have to comply with ERISA funding requirements. 

However, this information is at least 1 to 2 years old by the time it is fully 

available, making it an unreliable tool for determining a plan’s current 

financial condition. The value of plan assets can significantly change over 

this period of time, and the value of plan liabilities may also change 

because of changes in interest rates, plan amendments, layoffs, early 

retirements, and other factors. For plans that experience a rapid 

deterioration in their financial condition, the funding measures required in 

Form 5500 may not reveal the true extent of a plan’s financial distress to 

plan participants and the cognizant federal agencies. 

The Form 5500 Schedule B information is not timely for three main 

reasons. First, the plan’s assets and liabilities can be measured at the 

beginning of the plan fiscal year instead of the end of the year, resulting in 

information that is over a year old when the Form 5500 is filed. In 2001, of 

the 61 companies in our sample with both Form 5500 and corporate 

financial statement data, at least 48 used the beginning of the plan 

sponsor’s fiscal year for the plan’s measurement date.23 Second, ERISA 

allows plan sponsors 210 days, plus a 21⁄2 month extension, from the end of 

the plan fiscal year to file their Form 5500. According to PBGC officials 

and actuaries we spoke with, most plans file at the extension deadline, 

almost 10 months after the end of the fiscal year, and almost 2 years from 

the measurement date if it is the beginning of the fiscal year. Third, 

according to Department of Labor officials, it has taken an average of 61⁄2 

months to process Form 5500 filings, though actuaries and PBGC officials 

told us that recently, some processing has been completed within 1 to 2 

months of receiving the forms. Even with this improvement in processing 

time, most large companies’ 2003 pension data in Form 5500 will be based 

 23Actuaries for small pension plans told us that they normally use end-of-year data because 

it is not difficult to assemble information about all plan participants and their clients 

usually prefer to have contributions to the plan in synchronization with the benefits earned 

during the year. 

Form 5500 Information Is 

Untimely but Statutory 

Reporting Requirements 

Limit Opportunities to 

Improve Timeliness 
Page 18 GAO-04-395 Private Pensions 

on valuations as of January 1, 2003, and will not be available to the public 

until January 2005.24

There are several difficulties in making the filing of Form 5500 reports 

more timely. According to actuaries we spoke with, collecting and 

preparing the necessary information is time-consuming and resourceintensive for plan sponsors. Large companies’ human resource data are 

often not well organized for this purpose, according to two pension 

experts we spoke with. Common problems include merging information 

from different databases, dealing with retiree data that may not be 

computerized, and identifying vested participants who have left the 

company.25 The data collection and analysis becomes much more 

complicated when companies go through mergers, acquisitions, or 

divestitures. According to one senior pension actuary we spoke with, data 

preparation efforts can consume as much as 75 percent of the time 

involved in preparing the Form 5500 filing. Other issues include scheduling 

the work of auditors and actuaries who must review and work with the 

information once it has been assembled. 

Once the forms are completed and submitted to the Department of Labor, 

speeding up the processing also has complications. While the process is 

significantly faster now than it used to be, it depends on paper rather than 

electronic filing and is slowed because the Form 5500 is also used for 

defined contribution and welfare benefit plans. Only about 32,000 of the 

more than 1 million Form 5500 filings pertain to PBGC-insured defined 

benefit plans, and the filings for defined benefit plans are not readily 

identifiable in order to receive priority when the Department of Labor 

processes these forms. Additionally, if errors in the Form 5500 filing are 

identified, the filing is returned to the plan sponsor with a 30-day deadline 

for making corrections and refiling. If errors are not properly corrected in 

 24In practice, PBGC has taken steps to allow for timelier monitoring of those plans that may 

pose a financial risk to the single-employer pension insurance program. In 1993 PBGC 

established the Form 5500 intercept program, which has speeded up the process for 

obtaining information on the largest and most underfunded plans. For about 2,100 plans on 

the intercept list, the Department of Labor mails copies of their Form 5500 filings to PBGC 

before it begins to process them. 

25A vested participant has earned the nonforfeitable right to his or her accrued benefit. 

There are certain rules that private plan sponsors must follow regarding the length of time 

that participants must work in order to be fully vested in their accrued benefits. 

Participants are 100 percent vested in any contributions they make to a qualified plan, but 

may have to work for a certain period of time before earning a right to their employer’s 

contributions. 
Page 19 GAO-04-395 Private Pensions 

the first response, the administrator is notified and given an additional 

30 days to correct the amended filing. 

A second limitation in Form 5500 is that it is not required to furnish 

information about the ability of a plan to meet its obligations to 

participants if it were to be terminated.26 Compliance with ERISA funding 

rules, as reported in Form 5500, is often based on the plan’s current 

liability, which is the sum of all liabilities to employees and their 

beneficiaries under the plan. In theory, keeping a pension plan funded up 

to its current liability will ensure that the plan has assets to meet its 

benefit obligations to plan participants as long as the plan sponsor remains 

in business. However, if a plan is suddenly terminated because of its 

sponsor’s financial distress, the plan liabilities are likely to increase and 

plan assets are less likely to cover the cost of all benefit obligations. 

Therefore, Form 5500 information often does not accurately indicate the 

ability of the plan to meet its benefit obligations to plan participants in the 

event that the plan sponsor goes bankrupt. A different measure, called the 

termination liability, comes closer to expressing the pension plan’s cost of 

discharging the promised benefits to participants in a distress termination. 

The termination liability, which is usually higher than current liability, 

reflects the cost to a company of paying an insurer to assume its pension 

obligations were the plan to be terminated.27 PBGC has found no simple 

relationship between measures of current and termination liability, and 

therefore a fixed set of factors cannot be applied to the plan’s current 

liability funding level (or its components) to estimate termination liability. 

For plans whose vested benefits are underfunded by at least $50 million, 

PBGC receives a termination liability measure in a separate filing called a 

Section 4010 filing (named after the ERISA section that requires 

companies to submit such reports). However, this information is available 

only to PBGC and by law may not be publicly disclosed. 

 26Terminating an underfunded plan is termed a distress termination if the plan sponsor 

requests the termination or an involuntary termination if PBGC initiates the termination. 

PBGC assumes responsibility for terminated underfunded plans and pays the pension 

obligations to plan participants up to the amount guaranteed under Title IV of ERISA. 

PBGC also makes a claim on the employer’s assets in bankruptcy proceedings as an 

unsecured creditor. However, PBGC officials told us that the agency’s claims usually 

amount to only a few cents per dollar claimed. 

27Termination liability is calculated by using a PBGC interest factor, which is based on a 

survey of insurance companies and, along with a specified mortality table, reflects group 

annuity purchase rates. 

ERISA Does Not Require 

Reporting of Plan 

Termination Funding in 

Form 5500 
Page 20 GAO-04-395 Private Pensions 

The differences in the two types of liability measures are substantial 

enough that a plan can appear in reasonable condition under the current 

liability measure that serves as the basis for the minimum funding 

standard, but not have sufficient resources to settle plan termination 

liabilities. For example, Bethlehem Steel’s pension plan was 97 percent 

funded on a current liability basis in its 1999 Form 5500 filing. However, 

when the plan was terminated, in December 2002, it was funded at only 

45 percent on a termination liability basis.28 Plan terminations often result 

from a plan’s sponsor entering bankruptcy, which, according to PBGC 

officials, cannot usually be predicted more than a few months in advance. 

Some of the reasons that a plan can have a reasonable ratio of assets to 

liabilities under the current liability measure but a less than adequate ratio 

under the termination liability include 

• Different retirement ages. When companies shut down, many long-time 

employees retire and begin collecting pension benefits at an earlier age. 

• Different discount rates. Termination liability discount rates have 

usually been lower than for current liability in recent years, making the 

present value of termination liability larger. 

• Different plan provisions. Terminations may coincide with factory 

shutdowns, which often trigger provisions that increase retirement 

benefits. 

While the information about pensions in corporate financial statements 

does not serve the same purpose as the information in Form 5500, it can 

also be useful to the PBGC. This information is useful in two primary 

ways: 

• Its overall measures of the company’s financial condition provide 

indications about the company’s ability to meet its pension obligations. 

According to PBGC officials, most large plans that were terminated by 

PBGC were sponsored by companies whose debt was rated below 

 28See U.S. General Accounting Office, Pension Benefit Guaranty Corporation: SingleEmployer Pension Insurance Program Faces Significant Long-Term Risks, GAO-04-90

(Washington, D.C.: October 2003), pp. 17-19, for further discussion of the failure of the 

Bethlehem Steel pension plan. 

Corporate Financial 

Statement Information Can 

Supplement Form 5500 

Data 
Page 21 GAO-04-395 Private Pensions 

investment grade for a number of years prior to plan termination.29 Though 

plan asset-to-liability ratios are not dependent on the health of the plan 

sponsor, participants in underfunded pension plans at financially 

distressed companies face the risk that the plan sponsor will lack the cash 

resources to meet the ERISA funding requirements. In contrast, a company 

in a strong financial position is much more likely to be able to make up 

funding shortfalls. 

• It provides the timeliest public data about pension plans, which may be 

useful if the company sponsors only one pension plan. Within 60 to 90 

days from the end of their fiscal years, publicly traded companies must file 

their financial statements, which provide data based on measurements on 

the last day of a company’s fiscal year.30

Some primary users of corporate financial statements have expressed 

concerns about the extent to which these reports show how pension plans 

affect a company’s profitability, cash flow, and financial position. This 

information is particularly important for companies with large pension 

plans because the greater the value of a company’s pension assets relative 

to the company’s market value, the more sensitive its cash flows and 

profits will be to changes in pension asset values. According to analysis by 

Standard and Poor’s (S&P), a leading corporate debt rating agency, 

defined benefit pension plans significantly affect the earnings of about half 

of the companies in the S&P 500 index. As conveyed to us by financial 

analysts, investors’ concerns about financial reporting on pensions have 

been twofold: First, financial statements have heretofore lacked adequate 

disclosures about how pension plans affect the sponsoring companies’ 

cash flow and overall risk. Second, some investors believe that current 

standards for measuring pension expense do not adequately recognize the 

financial condition of pension plans and distort measures of company 

earnings. However, others argue that these standards provide a more 

 29Corporate debt rated below investment grade by the main debt rating agencies (Standard 

& Poor’s, Moody’s, Fitch Ratings) pays a higher interest rate to bondholders and is more 

expensive for companies than if their debt is rated investment grade. A below-investmentgrade rating indicates a significant risk that the company will not be able to repay its debt 

to bondholders. This risk is usually derived from a combination of a company’s 

profitability, cash flow, total debt, and other factors that are reported in corporate financial 

statements. 

30In 2002, the SEC adopted accelerated filing dates for 10-K reports for companies with a 

market capitalization of at least $75 million. Under these rules these companies must file 

their 10-K reports within 75 days for fiscal years ending on or after December 15, 2003, and 

within 60 days for fiscal years ending on or after December 15, 2004. 

Pension Accounting 

Disclosures and Methods 

Have Been Subjects of 

Debate 
Page 22 GAO-04-395 Private Pensions 

appropriate accounting of a company’s annual pension costs over the long 

term. 

Disclosure concerns, to date, have been of two main types: 

• First, according to financial analysts we spoke with, it has been difficult to 

reasonably estimate a pension plan’s claims on a company’s cash 

resources in the coming year and near future. Contributions are 

determined primarily by ERISA funding requirements, but the plan funding 

status reported in the Form 5500 is not current enough to be used by 

financial analysts and investors. Large required contributions to pension 

plans can reduce the cash available to companies to apply to shareholder 

dividends or invest in their business so that profits may continue to grow. 

For industries in which investors are concerned primarily with a 

company’s cash flow, estimates of such future contributions would be 

critically important, but have been unavailable to date.31

• Second, to date it has been difficult to accurately evaluate the risk that 

pension investments pose to the plan sponsor. The allocation of pension 

assets can pose additional risk to the company’s cash flow and 

profitability, especially for companies with very large pension plans. 

Investments in more volatile assets, such as equities, are likely to create a 

wider range of potential cash contributions for the company in the future, 

as companies may need to make contributions to meet statutory funding 

requirements following negative returns on pension assets. 

In addition to raising these disclosure concerns, some financial analysts 

and investors have also expressed opposition to current accounting 

standards for measuring pension expense, while others support these 

standards.32 Pension expense is included in the calculation of corporate 

earnings, which investors use to track a company’s performance, in 

comparison both with other firms and with a company’s own past 

performance. In order to reduce the potential volatile effect of pension 

plans on their sponsors’ earnings, the accounting standards call for three 

main smoothing mechanisms to calculate pension expense: (1) expected 

 31In December 2003 FASB revised its pension disclosure standard (FAS 132) to require 

disclosure of the employer’s best estimate of contributions expected to be paid during the 

next fiscal year. In addition, companies must disclose each major category of pension plan 

assets. 

32See appendix II for an example of how pension expense is calculated in a corporate 

financial statement. 
Page 23 GAO-04-395 Private Pensions 

return is used instead of actual return on pension assets, (2) the expected 

return may be based on an average value of pension assets rather than 

their current fair value,33 and (3) differences between actual experience 

and assumptions are recognized systematically and gradually over many 

years rather than immediately when they arise. Therefore, when the 

expected return on pension assets significantly differs from the actual 

return, this difference does not immediately affect a company’s reported 

pension cost or earnings. 

As actual experience differs from assumptions on such things as expected 

rates of return, inflation rates, and plan participant mortality rates, the 

differences are added to or subtracted from an account for unrecognized 

gains or losses.34 When unrecognized gains or losses exceed 10 percent of 

either the market-related value of pension assets or the projected benefit 

obligation, whichever is greater, the company must factor a fraction of the 

excess unrecognized gain or loss (difference between the total gain or loss 

and the 10 percent threshold) into its calculation of pension expense.35 For 

example, a company may experience 3 years of unusually high gains on its 

pension assets, and at the end of year 3, the cumulative difference between 

expected and actual returns on pension assets surpasses the minimum 

threshold for recognition of the difference. The company must record part 

of its unrecognized cumulative gain in its calculation of pension expense, 

thereby decreasing the pension expense for the year. 

Although actual and expected rates of return may differ sharply in any 

given year, or even over 2 to 3 years, the variance between them should 

decrease over the longer term, provided that expected rates of return are 

reasonably accurate. Table 4 shows the results of our comparison of 

expected and actual rates of return for 52 companies from our sample of 

Fortune 500 companies that had data available over the 9 years from 1994 

 33Statement of Financial Accounting Standards No. 87, Employers’ Accounting for 

Pensions, requires companies to determine the expected return on plan assets based on 

the expected long-term rate of return on plan assets and the market-related value of plan 

assets. The market-related value of plan assets is defined as “either fair value or a 

calculated value that recognizes changes in fair value in a systematic and rational manner 

over not more than five years.” 

34The unrecognized gains or losses account appears in the pension footnote to the 

corporate financial statement but is not recognized on the plan sponsor’s balance sheet. 

35The excess amount is amortized over the average remaining working years of active plan 

participants or average remaining life expectancy of retired plan participants if all or most 

participants are inactive. 
Page 24 GAO-04-395 Private Pensions 

through 2002. During this period the average expected rate of return used 

in the financial statements was 9.29 percent, while the average actual rate 

of return was 7.56 percent and ranged from a low of –8.85 percent to a 

high of 22.36 percent in any given year. 

Table 4: Average Expected and Actual Rates of Return on Pension Assets from 

1994 to 2002 for a Sample of Fortune 500 Companies 

Year 

Average expected 

rate of return 

(percent)

Average actual rate 

of return (percent) 

Average difference 

(actual minus 

expected)

1994 9.19 0.52 -8.67

1995 9.26 22.36 13.10

1996 9.26 14.21 4.95

1997 9.33 19.04 9.71

1998 9.32 12.55 3.23

1999 9.35 14.26 4.91

2000 9.45 5.07 -4.38

2001 9.45 -6.45 -15.90

2002 8.98 -8.85 -17.83

1997-1999 average 9.33 15.25 5.92

2000-2002 average 9.29 -3.59 -12.88

Nine-year average 9.29 7.56 -1.73

Source: GAO analysis of pension footnotes in corporate financial statements. 

Note: The average rates of return for multiyear periods in table 4 are geometric means, which are 

used to calculate the compound average, or the average annual return that would yield the same total 

change in asset values over a multiyear period. 52 companies in our sample had data available for 

this entire 9-year period. 

In comparison with the results of our analysis, a study by one investment 

bank revealed an average actual return on pension assets of greater than 

12 percent between 1985 and 1998.36 Therefore, average actual rates of 

return will vary according to the time period being measured. For 

example, for the companies in our sample, the average actual return on 

pension assets was 15.25 percent from 1997 through 1999 and 

–3.59 percent from 2000 through 2002. 

 36Goldman Sachs, Global Economics Weekly, “US: Pension Costs—Another Hit to Cash 

Flow,” November 13, 2002. 
Page 25 GAO-04-395 Private Pensions 

Opponents of current methods of accounting for pension expense argue 

that the smoothing mechanisms lack transparency because reported 

pension expense (1) does not reflect the current financial condition of 

pension plans and (2) distorts measures of corporate earnings. Under the 

current methodology for calculating pension expense, the cumulative net 

effect of pension asset gains or losses may not be reflected in reported 

pension expense for a few years, if at all. While alternating years of gains 

and losses may keep reported pension expense relatively smooth from 

year to year, consecutive years of gains or losses can eventually result in 

significant changes in reported pension expense. Many companies that 

reported pension income in 2001 and 2002, while their pension assets were 

in fact decreasing in value, benefited from the use of the market-related 

value of pension assets (the average asset values over not more than the 

previous 5 years) rather than the lower actual value of these assets. For 

example, of the 97 companies in our sample, 26 reported net pension 

income in 2002, but only one of these companies saw an increase in the 

value of its pension assets. Conversely, it is likely that many of these 

companies will report net pension expenses in the next few years, even if 

their pension asset values rise, because their market-related values of 

pension assets will reflect, in part, the decline in the stock market between 

2000 and 2002. 

In contrast, employer contributions, which are only indirectly related to 

pension expense, may better reflect the current financial condition of 

pension plans. Employer contributions to pension plans are determined by 

a complex set of factors, including the tax deductibility of contributions, 

minimum funding requirements, the employer’s expected cash flows, and 

PBGC premiums. In 2002, when most large companies saw declines in 

their pension asset values, many were required to make contributions to 

their pension plans to meet the statutory funding requirements. The 

93 Fortune 500 companies in our sample with available financial statement 

data reported aggregate contributions to pension plans of $10.1 billion in 

2002, while their aggregate pension expense totaled $622.6 million. 

Financial analysts pay close attention to companies’ cash contributions to 

pension plans because large contributions to plans represent resources 

that companies will not have available to use for other purposes, such as 

expanding their businesses. 

Investors have also been concerned about the extent to which defined 

benefit pensions contribute to a company’s total profits. According to one 
Page 26 GAO-04-395 Private Pensions 

investment bank study, 150 of the 356 Fortune 500 companies with defined 

benefit plans reported net pension income (negative expense) in their 

financial statements in 2001.37 However, the value of pension assets for 

313 of these companies actually declined in 2001. To try to address these 

apparent inconsistencies in the financial reporting on pensions, many 

financial analysts and investors try to strip out the effects of pensions to 

determine a “true” measure of a company’s earnings that reflects its 

performance from ongoing operations. For example, Standard and Poor’s 

issued a proposal in 2002 to standardize measures of corporate earnings 

that excludes several items from the earnings calculation, including 

investment returns on pension assets. 

Proponents of current pension accounting standards argue that the 

smoothing mechanisms are beneficial because (1) pension obligations are 

long-term liabilities that do not have to be funded all at once and 

(2) sponsoring pension plans and investing plan assets are not the primary 

business activities of plan sponsors. Pension obligations are normally paid 

out over a long period of time; therefore, pension assets have a similar 

time period to meet those obligations. The smoothing mechanisms allow 

plan sponsors to gradually and systematically attribute portions of the 

long-term cost of pension plans to each year. Without smoothing 

mechanisms, companies would potentially face year-to-year fluctuations in 

their reported pension expense that some investors may also consider 

misleading given that unexpected losses on pension assets in one time 

period may be offset by unexpected gains in another. 

The Financial Accounting Standards Board adopted the smoothing 

mechanisms in part to reduce the volatility of reported earnings caused by 

investment returns on pension assets. Because investing pension plan 

assets is not the primary business activity of plan sponsors, FASB 

determined that earnings volatility caused by immediately recognizing all 

changes in the value of plan assets and liabilities as they occur would be 

misleading to investors. Furthermore, such volatility could make 

comparisons of earnings more difficult when looking at different firms, 

some of which may not sponsor defined benefit plans. 

 37Credit Suisse First Boston, The Magic of Pension Accounting, September 27, 2002. 
Page 27 GAO-04-395 Private Pensions 

Both in this country and abroad, changes have been proposed—and in a 

few cases, implemented—to make information about defined benefit plans 

more transparent or complete. These changes relate to information 

associated with both Form 5500 and corporate financial statements. The 

administration has proposed augmenting current Form 5500 information 

by making available certain data that currently are not made public, such 

as measurements of termination liabilities. The Financial Accounting 

Standards Board has recently amended one of its accounting standards to 

require, among other things, that companies provide more information 

about the composition and market risk of their pension plan assets and 

their anticipated contributions to plans in the upcoming year. Outside the 

United States, proposals are being discussed that would move toward 

eliminating or reducing the use of smoothing mechanisms in calculating 

pension expense. 

In July 2003 the Department of the Treasury announced “The 

Administration Proposal to Improve the Accuracy and Transparency of 

Pension Information.” The proposal presented four areas of change, and 

one of them would broaden the public’s access to pension information 

currently available only to PBGC.38 The proposal would expand the 

public’s access to pension information in two main ways: 

• Reporting termination liability. Under the proposal, information about 

a plan’s termination liability would be included in ERISA-required 

summary annual reports to workers and retirees. The annual reports, 

which are based on data from the Form 5500 reports, now report the 

plan’s financial condition based on the plan’s current liability. Termination 

liability information is reported to PBGC by companies whose plans are 

collectively underfunded by more than $50 million. 

• Public disclosure of underfunding of at least $50 million. Section 

4010 of ERISA requires companies with more than $50 million in aggregate 

plan underfunding to file annual financial and actuarial information with 

the PBGC. This information is reported separately from Form 5500 

information and must generally be filed no later than 105 days after the 

end of the company’s fiscal year. PBGC uses this information to monitor 

plans that may be at greater risk of failure, but under current law, PBGC 

 38The four areas to improve pension security for Americans were (1) the accuracy of the 

pension liability discount rate, (2) the transparency of pension plan information, 

(3) safeguards against pension underfunding, and (4) comprehensive funding reforms. 

Changes to Pension 

Accounting and 

Regulatory Reporting 

Have Been 

Implemented or 

Proposed 

The Administration Has 

Proposed Making 

Additional Information 

Available Relating to 

Pension Risk 
Page 28 GAO-04-395 Private Pensions 

cannot make the information public. According to the administration, the 

information is more timely and better in quality than publicly available 

data. Under the proposal, the market value of assets, termination liability, 

and termination funding ratios contained in these reports would all be 

publicly disclosed. 

Since the announcement of the administration’s proposal, no further 

action has been taken by either the administration or Congress to 

implement these proposals. 

In regard to corporate financial statements, one change designed to 

address users’ concerns about pension-related information has recently 

been enacted. In December 2003 FASB issued a revision to its accounting 

standard on pension disclosures.39 The revised standard incorporates all of 

the disclosures required by the prior standard and requires more 

informative pension disclosures.40 FASB added the new disclosures 

because users of financial statements, such as financial analysts, requested 

additional information that would assist them to evaluate, among other 

things, the composition and market risk of the pension plan’s investment 

portfolio and the expected long-term rate of return used to determine net 

pension costs. As a result, some of the new disclosure requirements 

include listing the percentage of pension assets invested in major asset 

classes such as equity securities, debt securities, real estate, and other 

assets. Companies must also provide a narrative description of the basis 

used to determine the overall expected rate of return on assets 

assumption. The FASB believed that this new information would allow 

users to better understand a company’s exposure to investment risk from 

its pension plans and the expected rate of return assumption. Another 

required disclosure is the employer’s estimated contribution to pension 

plans in the following year. However, the revised standard does not 

change the general approach used in the financial statements of 

aggregating this information across all pension plans. 

 39See Statement of Financial Accounting Standards No. 132 (revised 2003), Employers’ 

Disclosures about Pensions and Other Postretirement Benefits. 

40In GAO’s response to the FASB’s exposure draft for new pension disclosures, we 

supported the initiative to enhance disclosures for pension and other postretirement 

benefits. We believe that improved transparency in plan funding and funded status, 

investment strategies, and market risk could reduce the risks to the federal government’s 

pension insurance programs and promote the retirement security of workers and retirees. 

FASB Has Changed U.S. 

Pension Disclosure 

Standards; Other Changes 

Being Considered Abroad 
Page 29 GAO-04-395 Private Pensions 

Outside the United States, other standard-setting boards have been 

addressing issues related to the use of smoothing techniques designed to 

smooth out the volatility of reported pension expense. One of these boards 

is the International Accounting Standards Board (IASB), an independent 

accounting standard–setting organization. Many countries require publicly 

traded companies to prepare their financial statements in accordance with 

IASB’s financial reporting standards. IASB’s current pension accounting 

standard is very similar to the current standard promulgated by FASB, in 

that both allow a smoothing mechanism to reduce the volatility of pension 

expense. However, IASB is considering a revision to its current standard 

to allow companies to calculate pension expense using actual investment 

returns instead of expected returns, on a voluntary basis. According to the 

IASB manager in charge of the project, the exposure draft will be issued in 

2004, and a final standard is expected in March 2005. Separately from the 

IASB action, the United Kingdom’s Accounting Standards Board has 

already issued its own accounting standard that would require companies 

to report the differences between actual and expected returns on pension 

assets in their financial statements.41 Full adoption of this standard has 

been delayed out of concern that the changes made by firms to comply 

with the Accounting Standards Board standard might need to be modified 

again in subsequent years to meet a potentially different IASB standard. 

Form 5500 reports and corporate financial statements both provide key 

pension financial data, but they serve different purposes and, as a result, 

provide significantly different information. To date, neither report in 

isolation provides sufficient information for certain users to fully 

determine the current financial condition of an individual pension plan or 

how pension obligations could affect the financial health of the plan 

sponsor. While particular concerns have been raised about differences 

between expected and actual pension asset rates of return reported on 

corporate financial statements, expected rates of return do not have a 

significant effect on the actual financial condition of plans. 

Continued concerns about the financial condition of plans and how this 

information is disclosed have been highlighted by the administration’s 

proposal to provide information about funding in the event of plan 

termination to plan participants and regulators. We have previously 

 41The United Kingdom’s Accounting Standards Board issued Financial Reporting Standard 

17, Retirement Benefits, in November 2000, and it was amended in 2002. 

Concluding 

Observations 
Page 30 GAO-04-395 Private Pensions 

reported that an essential element of pension disclosure should include 

requiring plans to calculate liabilities on a termination basis and disclosing 

this information to all participants annually. Likewise, we recommended 

that Congress consider requiring that all participants receive information 

about plan investments and the minimum benefit amount that PBGC 

guarantees should their plan be terminated.42 While such new requirements 

could help improve the transparency of pension plans’ financial condition, 

there are other challenges to be addressed as well. For example, plan 

participants and regulators continue to need more timely information. 

However, there appear to be few opportunities to improve the timeliness 

of Form 5500 information under the current statutory reporting 

requirements. One challenge to improving the timeliness of this 

information on pensions will be to find a solution that does not impose 

undue burdens on plan sponsors. Resolving this challenge will prove 

crucial to providing policy makers, plan participants, and investors with 

more timely and transparent information on the financial condition of 

defined benefit plans. 

We provided a draft of this report the Department of the Treasury, the 

Department of Labor, the Pension Benefit Guaranty Corporation, the 

Securities and Exchange Commission, and the Financial Accounting 

Standards Board. We received technical comments from each agency that 

we incorporated as appropriate. 

We are sending copies of this report to the Secretary of Labor, the 

Secretary of the Treasury, the Executive Director of the Pension Benefit 

Guaranty Corporation, the Chairman of the Securities and Exchange 

Commission, the Chairman of the Financial Accounting Standards Board, 

appropriate congressional committees, and other interested parties. We 

will also make copies available to others on request. In addition, the report 

will be available at no charge on GAO’s Web site at http://www.gao.gov. 

 42See GAO-04-90. 

Agency Comments 
Page 31 GAO-04-395 Private Pensions 

If you have any questions concerning this report please contact me at 

(202) 512-7215 or George Scott at (202) 512-5932. Other contacts and 

acknowledgments are listed in appendix III. 

Sincerely yours, 

Barbara D. Bovbjerg 

Director, Education, Workforce, 

 and Income Security Issues 
Appendix I: Scope and Methodology 

Page 32 GAO-04-395 Private Pensions 

To explain the two sources of pension financial information, we 

interviewed federal agency officials from the Pension Benefit Guaranty 

Corporation (PBGC) and the Department of Labor (DOL). These federal 

agencies use Form 5500 information in performing their oversight and 

monitoring responsibilities. In addition, we reviewed the Form 5500 

instructions, form, and schedules to understand the information they 

provide. For the financial statements, we reviewed relevant accounting 

standards from the Financial Accounting Standards Board, which sets 

standards for financial statements, and spoke with board officials. We also 

reviewed many financial statements of large domestic companies. 

Our work also included analyses of a sample of corporate financial 

statements of Fortune 500 companies and the corresponding Form 5500 

filings for those companies with available data. We chose to sample from 

the universe of publicly owned Fortune 500 companies with defined 

benefit plans because (1) the pension plans sponsored by these firms 

represent a large percentage of the total private defined benefit pension 

plan participants, assets, and liabilities in the United States; (2) these firms 

tend to have the largest defined benefit plans, and if these plans fail they 

would create the largest burdens for PBGC and possibly the government; 

and (3) most of these firms are publicly traded, so their corporate financial 

statements are publicly available. 

We drew a systematic random sample of 100 of the 2003 Fortune 

500 companies with defined benefit plans, after excluding governmentsponsored entities. The sampling process accounted for the companies’ 

revenues in 2002 and the distribution of expected rates of return on 

pension assets. This distribution was available in a Compustat database 

for approximately 290 of the 329 companies in the population. From the 

initial sample of 100 companies, 3 companies were removed because one 

is not publicly traded, another is European and filed its financial 

statements in euros, and the third changed its end-of-fiscal-year date in 

2001, which made it more difficult to compare with other firms. For the 

97 remaining companies, we obtained as much as 10 years of pension data 

from these companies’ corporate financial statements using the Securities 

and Exchange Commission’s Electronic Data Gathering, Analysis, and 

Retrieval System (EDGAR), depending on data availability. Data were 

available from 1993 through 2002 for 68 companies. However, others did 

not have 10 years of data available because, for example, they were 

formed, or only began to publicly trade their stock, at some time between 

1993 and 2002. Nine companies in our sample reported more than one 

expected rate of return for their pension plans and a weighted average 

could not be determined accurately. Most of these companies sponsor 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 33 GAO-04-395 Private Pensions 

pension plans for employees outside the United States and provide 

separate assumptions for domestic and international plans. These 

companies did not report the weighted average expected rate of return 

that was used to calculate their expected return on pension assets. 

We also obtained the corresponding Form 5500 filings for the companies 

in our sample from PBGC for plan years 1993 through 2001.1

 To identify 

these filings, we matched the sample of 97 Fortune 500 companies to their 

pension plans on the basis of their employer identification number (EIN). 

An EIN, known as a federal tax identification number, is a nine-digit 

number that the IRS assigns to organizations. We developed a list of EINs 

reported on the companies’ financial statements and provided this list to 

the PBGC. PBGC matched the EINs to their Form 5500 database and 

provided information to us. However, in several cases, PBGC did not find 

matches to our list of EINs, either for all 10 years or for just some of the 

years. Based on the number of companies with data available in any of the 

10 years, we decided on a threshold of 7 years’ worth of data in order to 

achieve a sample size that would allow us to compare data over most of 

the 10-year period. In other words, to be included in this analysis, a 

company must have at least 7 years of Form 5500 data. One hundred and 

fifty plans had at least 7 years of Form 5500 data.2

 The years in which data 

were missing were spread sporadically among the 10-year period covered 

in this analysis. 

Before deciding to use the Form 5500 data, we investigated its reliability. 

Prior to plan year 1999, the Internal Revenue Service was responsible for 

keypunching Form 5500 information into a database, and DOL officials 

explained that some of the data contained errors. DOL officials explained 

that since plan year 1999, Form 5500 data have been recorded with optical 

scanning devices and have been subject to edit and validity tests. In 1999, 

some Form 5500 filings were not captured because many plan 

administrators did not send forms on the correct paper and the scanner 

could not capture some information. However, DOL officials explained 

that this problem has not occurred since. We obtained the Form 5500 data 

from PBGC’s Corporate Policy and Research Department. PBGC officials 

explained that as errors surface in their use of the Form 5500 data, 

corrections are made to PBGC’s database. In the past hard copies of 

 1

Because of the filing requirements of Form 5500, no data were available for 2002 during 

the course of our study. 

2

Some of the 97 companies in our sample sponsor more than one pension plan. 
Appendix I: Scope and Methodology 

Page 34 GAO-04-395 Private Pensions 

original Form 5500 filings were obtained for making corrections. Today 

PBGC can view electronic images of the actual plan filings. As PBGC 

receives the data on Form 5500 Schedule B, it screens the data for errors, 

particularly in the asset and liability fields. Information we received from 

pension actuaries corroborates the data we used from Form 5500 filings 

and the data on expected rates of return, as presented in figure 1, show 

consistency from year to year. Taking all these factors into consideration, 

we feel that the data we used were sufficiently reliable for the purpose of 

differentiating between expected rates of return reported in Form 5500 

filings and corporate financial statements. 

In obtaining financial information for the sample companies, we had to 

account for companies that had merged with another company during the 

10-year period under review. In the event of a merger between a company 

with a defined benefit pension plan and a company without a defined 

benefit plan, we selected the company with the defined benefit plan. In the 

case of a merger between two companies that both had defined benefit 

plans prior to the merger, we selected the company indicated by the 

EDGAR database as the predecessor company. 

While our sample is designed to represent our population for calendar year 

2002, it is not representative of any population in prior years. The makeup 

of the Fortune 500 changes from year to year, and our method of tracking 

the same companies across several years precludes us from making 

specific statements about any larger population prior to 2002. Thus, while 

we believe that the trends identified in our sample could be indicative of 

trends in the population of large firms with defined benefit plans and that 

this supposition is supported by other studies, we do not claim these 

trends are representative of past populations of Fortune 500 companies. 

To explain the usefulness and limitations of the information from the two 

information sources, we interviewed expert users of pension information 

in Form 5500 reports and corporate financial statements, including federal 

officials from DOL, PBGC, and SEC; pension actuaries; corporate debt 

rating agency officials; financial analysts; and Financial Accounting 

Standards Board officials. Some experts explained the uses of information 

available in the Form 5500 reports and limitations of these reports. Other 

experts described and shared documentation about how they analyze 

financial statements to understand the impact of pension plans on the plan 

sponsors’ financial statements. Some experts explained the need for 

additional pension information in companies’ financial statements. As part 

of our review of pension information in corporate financial statements, we 

used several research reports published by different investment banks. We 
Appendix I: Scope and Methodology 

Page 35 GAO-04-395 Private Pensions 

reviewed the methods used in these studies and found them to be 

sufficiently reliable for the purpose of corroborating our own data analysis 

and illustrating trends in pension accounting. 

To explain the recent and proposed changes to the current information 

sources, we interviewed officials from the International Accounting 

Standards Board and the Financial Accounting Standards Board. These 

boards set standards for financial statements for international companies 

and United States companies, respectively. We also reviewed the recently 

revised accounting standards issued by the Financial Accounting 

Standards Board. We also reviewed congressional testimony regarding the 

administration’s proposal for more transparency of pension data. 

We conducted our work between January 2003 and January 2004 in 

accordance with generally accepted government auditing standards. 
Appendix II: Expected and Actual Returns in 

Financial Statements 

Page 36 GAO-04-395 Private Pensions 

This appendix shows two things: (1) how a company may experience an 

actual loss on its pension assets while reporting income from its pension 

plans in the same year and (2) how a change in the expected rate of return 

affects other items in the financial statement. The information is based on 

numbers taken from the corporate financial statement of a real company 

from its 2002 fiscal year. 

Company X’s pension assets lost $512 million in value during its fiscal 

year, yet Company X still reported pension income of $90 million. This 

apparent inconsistency is possible because the expected return on assets 

is used in place of actual returns to calculate net periodic pension cost. 

The second column of table 5 shows the effect of changing the expected 

long-term rate of return on pension assets from 9.8 percent to 8.5 percent. 

The figures affected by this change are in bold text. All of the changes 

caused by the change in the expected rate of return are related to 

measurements of Company X’s pension expense and measures of overall 

profitability. The change has no impact at all on measures of pension 

assets and liabilities. 

Appendix II: Expected and Actual Returns in 

Financial Statements 
Appendix II: Expected and Actual Returns in 

Financial Statements 

Page 37 GAO-04-395 Private Pensions 

Table 5: Corporate Financial Statement Example—Elements of Pension Footnote 

and Statement of Operations for Company X for Different Expected Rates of Return 

Dollars in millions except earnings per share 

Item Key pension footnote elements 2002 2002

Change in benefit obligation

A Benefit obligation at beginning of year $7,382 $7,382 

B Service cost 115 115 

C Interest cost 529 529 

D Plan amendments 0 0 

E Actuarial losses 395 395 

F Benefits paid (611) (611)

G Benefit obligation at end of year $7,810 $7,810 

Change in plan assets

H Fair value of plan assets at beginning of year $7,431 $7,431 

I Actual return on plan assets (512) (512)

J Employer contributions 135 135 

K Participant contributions 0 0 

L Benefits paid (611) (611)

M Fair value of plan assets at end of year $6,443 $6,443 

 Rate assumptions: 

N Expected long-term rate of return on plan 

assets 

 9.8% 8.5%

O Discount rate 7.0% 7.0%

P Expected rate of compensation increase 4.0% 4.0%

Components of net periodic cost of defined benefit plans

Q Service cost $115 $115 

R Interest cost 529 529 

S Expected return on plan assets (783) (679)

T Amortization of prior service cost 50 50 

U Amortization of net actuarial (gain) loss (1) (1)

V Total (benefit) cost included in results of 

operations 

 $(90) $14 

Not reported in pension footnote 

W Market-related value of plan assets $ 7,990 $ 7,990

X Total sales and revenues $20,152 $20,152 

Y Total operating costs 18,833 18,947 

Z Operating profit 1,319 1,205 
Appendix II: Expected and Actual Returns in 

Financial Statements 

Page 38 GAO-04-395 Private Pensions 

Item Key pension footnote elements 2002 2002

AA Consolidated profit before taxes 1,114 1,000 

BB Provision for income taxes 312 280 

CC Net profit 802 720 

DD Earnings per share $2.33 $2.09 

Source: GAO analysis. 

An explanation of the pension elements in table 5 follows in table 6. 
Appendix II: Expected and Actual Returns in 

Financial Statements 

Page 39 GAO-04-395 Private Pensions 

Table 6: Definitions of Pension Footnote Items in Table 5 

Item Definition 

A The projected benefit obligation is the present value of all future retirement benefits earned and not yet paid to 

date, including estimates of salary growth over time. Measurements of the projected benefit obligation are 

provided for both the beginning and the end of the year. 

B The service cost represents the actuarial value of benefits earned by employees during the year. It is used to 

show the change in benefit obligation from the beginning to the end of the year and in the calculation of net 

periodic pension cost. 

C The interest cost represents the increase in the company’s projected benefit obligation as a result of the 

passage of time. The deferred compensation arrangement of pension plans entails a time value of money 

aspect. It is used to show the change in benefit obligation from the beginning to the end of the year and in the 

calculation of net periodic pension cost. 

D Plan amendments include the initiation of new plans and provisions that grant increased benefits based on 

services rendered in prior periods. 

E Actuarial losses (gains) reflect changes to any assumption that increase (decrease) the value of the projected 

benefit obligation. Assumptions include the discount rate, salary inflation, mortality, retirement age, and other 

factors. 

F Benefits paid represent the amount of cash payments from the pension plan to retired plan participants. These 

payments are cash outflows primarily from the pension plan(s). Benefits paid reduce the outstanding value of 

total pension obligations to plan participants. 

G See Item A. 

H The fair value of assets is the market value of the stocks, bonds, real estate, and other assets held by the 

company’s pension plan(s) on the measurement date. Values of pension assets are provided for both the 

beginning and the end of the company’s fiscal year. 

I The actual return on plan assets is the change in the value of pension assets from changes in market prices on 

the assets held by the plan(s). The actual return includes dividends and interest income. Company X’s pension 

plans lost $512 million. 

J Employer contributions are the total contributions (usually cash) made by the company to its pension plan(s). 

Employer contributions are not the same as the net cost to the company sponsoring the pension plans. 

K Participant contributions are the total amount of cash paid into the pensions plan(s) by employees. The 

employees of Company X did not contribute to their defined benefit pension plans in this year. 

L Benefits paid—this is generally the same as in Item F. Benefits paid reduce the value of assets held by the 

company’s pension plan(s). 

M See Item H. 

N The expected long-term rate of return on plan assets is the company’s assumption about the long-term average 

rate of return on its pension plan assets. The rate disclosed in the current year is used to calculate the expected 

return on plan assets (Item S) in the components of net periodic cost of defined benefit plans. 

O The discount rate should reflect the interest rate on high-quality corporate bonds. It is used to the measure the 

present value of the projected benefit obligation in the current year and will be used to calculate the service cost 

and interest cost in the following year. 

P The expected rate of compensation increase is used to calculate the projected benefit obligation and service 

cost when benefits take future salary into account. 

Q See Item B. 

R See Item C. 
Appendix II: Expected and Actual Returns in 

Financial Statements 

Page 40 GAO-04-395 Private Pensions 

Item Definition 

S The expected return on plan assets is an estimate of what the company expects to earn from the investment of 

pension plan assets; it reduces the company’s periodic pension expense and is used to keep this expense 

relatively smooth over many years. It is calculated by multiplying the expected rate of return (Item N) by the 

“market-related” value of plan assets (Item W). The expected return is reported as a negative number because it 

reduces the overall periodic pension cost. 

T The amortization of prior service cost is the periodic cost recognized by the company for pension benefits 

credited to employees for service prior to their enrollment in a pension plan. 

U Amortization of net actuarial (gain) loss is used when the cumulative difference between actual experience and 

assumptions reaches a threshold of 10 percent of either the market-related value of total pension assets or 

obligations, whichever is greater. Company X is recognizing $1 million in this year for past actual gains that 

exceeded expected gains. This amortization reduces its pension cost by $1 million for this year. 

V The total (benefit) cost included in results of operations is the total of Items Q – U and may also be called the net 

periodic pension cost. It is the amount included in the company’s labor costs, which are reported in the 

consolidated statement of operations (income statement). 

W The market-related value of plan assets is not required to appear anywhere in the financial statement but is used 

to calculate the expected return on plan assets (Item S). The market-related value of plan assets can either be 

the fair market value of plan assets or an average value of the assets over a period not exceeding 5 years. It is 

possible to closely estimate the market-related value of plan assets by dividing the expected return on plan 

assets by the expected long-term rate of return on plan assets. 

Source: GAO analysis. 

A company’s total operating costs include its labor costs, which include 

the net periodic pension cost. Therefore the net periodic pension cost is 

factored into the calculation of total operating costs, which affects 

operating profit, consolidated profit before taxes, the calculation of tax to 

be paid, and net profit (Items Y—CC in table 5). 

Changing the expected rate of return on plan assets from 9.8 percent to 

8.5 percent has the following effects: 

In the components of net periodic cost of defined benefit plans, the 

expected return on plan assets (Item S) falls from $783 million to 

$679 million.1

 This increases the total periodic pension cost by 

$114 million, which is enough to turn Company X’s periodic pension 

income of $90 million into a cost of $14 million. 

The increase in net periodic pension cost of $114 million increases the 

companies total operating costs (Item Y) and decreases the operating 

profit (Item Z) and consolidated profit before taxes (Item AA) by the same 

 1

The expected return on plan assets of $679 million was calculated by multiplying the 

market-related value of plan assets (Item W) by the new expected long-term rate of return 

on plan assets (Item N) of 8.5 percent. 
Appendix II: Expected and Actual Returns in 

Financial Statements 

Page 41 GAO-04-395 Private Pensions 

amount. Because taxable income is reduced, Company X pays less in 

corporate income tax (Item BB). Last, net profits (Item CC) decline from 

$802 million to $720 million, which for Company X’s shareholders of 

approximately 344 million shares of common stock would have meant a 

drop of about 24 cents in earnings per share (Item DD). 
Appendix III: GAO Contacts and Staff 

Acknowledgments 

Page 42 GAO-04-395 Private Pensions 

George A. Scott, Assistant Director (202) 512-5932 

Richard L. Harada, Analyst-in-Charge (206) 287-4841 

In addition to those named above, Joseph Applebaum, Kenneth Bombara, 

Richard Burkard, David Eisenstadt, Elizabeth Fan, Michael Maslowski, 

Scott McNulty, Stan Stenerson, Roger Thomas, and Shana Wallace made 

important contributions to this report. 

Appendix III: GAO Contacts and Staff 

Acknowledgments 

Contacts 

Staff 

Acknowledgments 

(130217) 
The General Accounting Office, the audit, evaluation and investigative arm of 

Congress, exists to support Congress in meeting its constitutional responsibilities 

and to help improve the performance and accountability of the federal 

government for the American people. GAO examines the use of public funds; 

evaluates federal programs and policies; and provides analyses, 

recommendations, and other assistance to help Congress make informed 

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