Private Pensions: Publicly Available Reports Provide Useful but Limited Information on Plans' Financial Condition
Published: 2004-03-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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. 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.

section_title: Letter
paragraphs: 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  plan’s assets, liabilities, actuarial assumptions, and employer  contributions. 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.
subsections: section_title: Background
paragraphs: 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  defined contribution plans (including 401(k) 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.
Under a defined benefit plan, the employer is responsible for funding the  benefit, investing and managing plan assets, and bearing the investment  risk. 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  plan sponsor cannot meet its pension obligations. 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, as well as the  serious, long-term risks to the program’s future viability. 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. 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. Plan administrators of private sector pension  and welfare plans are generally required to file a Form 5500 each year.  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.  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  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. Standards for reporting  this information are set by the Financial Accounting Standards Board.
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,  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.”
section_title: Form 5500 Reports and Corporate Financial Statements Differ in Key Respects
paragraphs: 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.
subsections: section_title: Form 5500 Reports and Corporate Financial Statements Serve Different Purposes
paragraphs: 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  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.
section_title: Measures of Pension Assets and Liabilities Differ in Form 5500 Reports and Corporate Financial Statements
paragraphs: 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.
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  1999-2001 and the resulting effects on the reported pension funding ratios  (pension assets divided by pension 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.
section_title: Form 5500 Reports and Corporate Financial Statements Use Expected Rates of Return Differently
paragraphs: 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  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.
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. 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  the plan. 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. 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. 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; (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  pension assets. 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. 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. 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.
section_title: Both Reports Provide Complementary Pension Information but Do Not Fully Satisfy Users
paragraphs: 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  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.
subsections: section_title: Form 5500 Information Is Untimely but Statutory Reporting Requirements Limit Opportunities to Improve Timeliness
paragraphs: 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. Second, ERISA  allows plan sponsors 210 days, plus a 2½ 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 6½  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  on valuations as of January 1, 2003, and will not be available to the public  until January 2005.
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 resource- intensive 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. 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  the first response, the administrator is notified and given an additional   30 days to correct the amended filing.
section_title: ERISA Does Not Require Reporting of Plan Termination Funding in Form 5500
paragraphs: 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. 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. 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.
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. 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.
section_title: Corporate Financial Statement Information Can Supplement Form 5500 Data
paragraphs: 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  investment grade for a number of years prior to plan termination. 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.
section_title: Pension Accounting Disclosures and Methods Have Been Subjects of Debate
paragraphs: 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  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.
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. 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  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, 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. 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. 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  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.
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. 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.
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  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. 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.
section_title: Changes to Pension Accounting and Regulatory Reporting Have Been Implemented or Proposed
paragraphs: 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.
subsections: section_title: The Administration Has Proposed Making Additional Information Available Relating to Pension Risk
paragraphs: 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. 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  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.
section_title: FASB Has Changed U.S. Pension Disclosure Standards; Other Changes Being Considered Abroad
paragraphs: 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. The revised standard incorporates all of  the disclosures required by the prior standard and requires more  informative pension disclosures. 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.
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. 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.
section_title: Concluding Observations
paragraphs: 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  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. 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.
section_title: Agency Comments
paragraphs: 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.
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.
section_title: Appendix I: Scope and Methodology
paragraphs: 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 government- sponsored 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  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. 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. 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  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  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.
section_title: Appendix II: Expected and Actual Returns in Financial Statements
paragraphs: 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.
An explanation of the pension elements in table 5 follows in table 6.
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. 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  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).
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: Contacts
section_title: Staff Acknowledgments
paragraphs: 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.