SEC Filings Don't Tell the Whole Pension Story

You're entitled to think that the documents companies file with the Securities and Exchange Commission have some basis in economic reality. But when you run into something like United Airlines' pension numbers, you realize how big a difference there can be between SEC filings and the real world.

Here's the deal: United's parent UAL Corp. said in a March 16 SEC filing that its pension shortfall at year-end was $6 billion. In other words, UAL's pension funds had $6 billion less in assets than they needed to meet future obligations.

But when the Pension Benefit Guaranty Corp., the federal agency that insures pensions, took over the plans last week, it came up with a much bigger shortfall: $9.8 billion. That's almost $4 billion more than UAL had said in its SEC filing.

How can this be? The shortfall certainly didn't grow by 65 percent this year. The problem is that pension accounting, opaque on its best days, is downright impenetrable in this case.

UAL was accounting for its plans as if it were going to run them for decades, even though the company had been in Chapter 11 protection for two years and was in the process of dumping the plans onto the PBGC.

The agency did its pension math differently because it was terminating the plans, thus taking over their assets and assuming their liabilities. The PBGC got insurance companies to tell it how much money they wanted to issue annuities to take over the plan's obligations. The PBGC took that number, subtracted the assets in the plan, and came up with $9.8 billion.

Because annuity issuers tend to bid conservatively and to build in a profit margin for themselves, the PBGC's termination numbers are vastly different from the numbers that companies file as going concerns. UAL, for instance, assumed that its pension funds would earn 9 percent a year on their assets. You can be sure the insurance companies submitting bids to the PBGC assumed a much lower return. (The agency doesn't know what return the companies assumed.)

United says it acted perfectly properly in reporting a $6 billion shortfall, rather than $9.8 billion. "The way we accounted for the pension shortfall is dictated by generally accepted accounting principles," spokeswoman Jean Medina said. "It is not discretionary. How the PBGC calculates the shortfall on a termination basis is irrelevant to our books."

The PBGC says it's taking the right approach, too, even though it manages the plans it takes over rather than buying annuities. PBGC spokesman Randy Clerihue said the agency uses the same method to measure the cost of terminating sick pension plans that companies use to terminate healthy plans. When a healthy plan terminates, employees typically get a lump-sum cash payout or an annuity from an insurance company.

Clerihue said that about 1,000 healthy plans terminated last year, compared with 192 that were dumped onto the PBGC. "When a plan terminates, it can to go a private insurance company or to the PBGC," he said. "It shouldn't be cheaper to terminate with the PBGC than with a private insurer."

By using termination math, the PBGC gives itself a bigger claim in the bankruptcy proceedings of the companies whose plans it terminates. (Most companies whose plans the PBGC takes over are in bankruptcy proceedings, or soon will be.) A bigger claim gives the PBGC more clout in bankruptcy maneuvering and a bigger piece of the settlement than it would otherwise get.

In UAL's case, the PBGC has negotiated a deal for post-bankruptcy securities that have a face value of $1.5 billion but an economic value that will almost certainly be substantially lower.

The difference between UAL's shortfall calculation and the pension agency's calculation is an example of how hard it can be to translate SEC filings into economic reality.

The PBGC says that all companies with a pension shortfall of $50 million or more have to submit termination analyses. However, the agency doesn't make those analyses public. To choose an obvious example, General Motors says that its U.S. pension plans are slightly overfunded, while the PBGC's termination analysis -- which isn't available -- probably shows a hole the size of the Grand Canyon.

"If I were an investor in a distressed company, I'd pay special attention to the pension footnotes" in SEC filings, says Laura Rosenberg of Fiduciary Counselors, formerly a high-ranking PBGC official. "I would look at the assumptions the company is making, and compare them with the numbers that the PBGC is using." That way, she says, you get a much more realistic idea of what will happen if the pension plans terminate.

Termination numbers didn't matter much back during the bull market when most pension funds and many companies were fat and happy. But now, you've really got to pay attention. You've always had to take SEC filings with a grain of salt. Now, you need an entire salt lick.

Sloan is Newsweek's Wall Street editor. His e-mail address issloan@panix.com.