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. 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. 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. 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. 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 Accounting Disclosures and Methods Have Been Subjects of Debate

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. 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. 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. The Administration Has Proposed Making Additional Information Available Relating to Pension Risk

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. In December 2003 FASB issued a revision to its accounting  standard on pension disclosures. However, the revised standard does not  change the general approach used in the financial statements of  aggregating this information across all pension plans. Concluding Observations

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. 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. For example, plan  participants and regulators continue to need more timely information. 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.
Why GAO Did This Study

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.

What GAO Found

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.