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FP says ACE Should Fear New Pension Rules


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FP says ACE, others should fear new pension rules

Wednesday, October 25, 2006.

The Financial Post reports in its Wednesday, Oct. 25, edition that new

pension accounting rules will cause companies in the TSX 60 to lose money on

their balance sheets. The Post's Duncan Mavin writes the new rules force

companies to put their pension surplus, or in most cases deficit, directly in

the accounts. Veritas Investment Research analyst Dimitry Khmelnitsky

estimates the rule change could cause TSX 60 companies to lose a total of

$20-billion or more on their balance sheets. He says, "Investors are

definitely concerned." Mr. Khmelnitsky has had dozens of calls from fund

managers who want to know what the new rules mean. The Veritas report shows

that ACE Aviation Holdings will take a severe hit. Shareholders will see

their equity drop by more than $800-million, or 70 per cent. The new rules

will cut the Nortel Networks balance sheet by $580-million, or almost

two-thirds. At Bombardier, shareholder equity will fall by $1.7-billion, or

61 per cent. Companies like these might find the new rules hamper their

ability to meet loan covenants. The rules will take effect after December,

2007.

2006 Canjex Publishing Ltd.

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FASB Statement No. 158

The Financial Accounting Standards Board (“FASB”) also just took its first major step in the process of revising the financial statement disclosure requirements relating to defined benefit pension and other postretirement plans. FASB Statement No. 158 (“FAS 158”) requires employers to recognize a plan’s funded status on their balance sheets for the first time. For publicly traded companies, this change is effective for fiscal years ending after December 15, 2006 (i.e., effective for 2006 financial statements of calendar-year companies).

Previously, the funded status of plans was disclosed in financial statement footnotes. For purposes of the new rule, a pension plan’s funded status is to be measured as the difference between plan assets and the plan’s projected (rather than accumulated) benefit obligation, meaning that the benefit liability will reflect assumed future pay increases, rather than simply benefits accrued to date. FAS 158 also applies to postretirement medical and other welfare benefit plans but permits these plans to measure their accumulated postretirement benefit obligation. For many companies, FAS 158 reportedly will result in reductions in balance-sheet shareholder equity.

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Very nice step towards the security of pensions in the future. Recognition of the fact that they are in fact an "obligation" of a corporation and not something that can be conveniently opted out of.

Bad for shareholders of companies that have been taking advantage of this loophole, but great for the real-world health of companies going forward, as this change allows for clearer analysis of a company's financial position and therefore net worth.

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Watch for the different lobbyists to ask for a delay or change of this law.... I can't see companies being too keen on this new rule. They will instantly lose a huge chunk of their equity disapear!!

Investors will probably steer clear of these companies in 2007.

I wonder if this law is a direct result of the many pension defaults in the US?

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Very nice step towards the security of pensions in the future. Recognition of the fact that they are in fact an "obligation" of a corporation and not something that can be conveniently opted out of.

Bad for shareholders of companies that have been taking advantage of this loophole, but great for the real-world health of companies going forward, as this change allows for clearer analysis of a company's financial position and therefore net worth.

And the death knell for DB pension plans in Canada.

That will make up for what goes or doesn't go on the books.

DC it is, boys and girls.

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At least if a company is a real dog it will be known. No problem with a DC plan, just increase the salaries to pay for a real pension to make it all worthwhile. wink.gif

The problem is no one wants to pay......so let them eat cake upon retirement. Unless of course one has $30 million in stock options to fall back on. LOL

Edited by Dork
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Guest rattler

Other countries require the same and LH for one has dealt with the problem.

Lufthansa funds E4bn in pension liabilities

Published:  24 May, 2004

 

Lufthansa shifts assets to trust

Lufthansa, the German national airline, is to fund E4.3bn in pension liabilities, and is to put the entire fund up for tender. It is currently looking for managers for Asian equities, euro corporate bonds, US bonds and emerging market bonds.

The company has made good on a year-old promise to remove the liabilities from its balance sheet to be funded via a contractual trust arrangement (CTA), an external pension fund similar to an Anglo-Saxon trust.

Lufthansa has hired HSBC Trinkaus & Burkhardt, the Düsseldorf-based private bank, as its investment advisor, and has defined six asset classes for its portfolio.

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Other countries require the same and LH for one has dealt with the problem.

Excuse me, Rattler, but all they did was move it into a different trust vehicle. It's not like they actually paid off the liability. Doesn't an "anglo-saxon trust" sound a little Enron to you?

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And the death knell for DB pension plans in Canada.

That will make up for what goes or doesn't go on the books.

DC it is, boys and girls.

Dagger, funny that you keep accusing employees of suspecting a plot to finish off the pensions or convert them, then comment as you have.

You know, your manhood/personhood is not threatened if you actually agree with us from time to time....

Vs

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The trouble is the notice does not say whether the funding status going on the Balance Sheet is the "Solvency" basis calculation or the "Going Concern" calculation. The most recent Pension Status Report I can find is for January 1st 2005 and it is:

Solvency basis deficit: $1.4 Billion

Going Concern basis Deficit: $99 Million

So knowing which figure gets added to the Balance Sheet might help to determine the impact.

Anyone have a more recent Pension Status Update??

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While I like the terms of the current DB plan, if offered the option for DC- one that could never be taken away, EVER- I would take it in the amount of time it takes dagger to register his support any anti-pilot news (a nanosecond). biggrin.gif Personally I don't relish the prospect of worrying about the DB plan daily for the next 30 years...

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Guest rattler

Excuse me, Rattler, but all they did was move it into a different trust vehicle. It's not like they actually paid off the liability. Doesn't an "anglo-saxon trust" sound a little Enron to you?

Not according to LH.

Alongside adequate retained earnings, the ratio will benefit from the outsourcing of company pension obligations, which began in 2004. For that purpose, Lufthansa has set up a securities-based fund under a Contractual Trust Agreement (CTA) to accommodate its retirement benefit obligations and remove them entirely from the balance sheet over a period of 10 to 15 years. This will provide staff with additional funded cover for their company pension entitlements.

http://lhir-pb01-m02.pironet-ndh.com/servl...1_l2/index.html

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The trouble is the notice does not say whether the funding status going on the Balance Sheet is the "Solvency" basis calculation or the "Going Concern" calculation. The most recent Pension Status Report I can find is for January 1st 2005 and it is:

Solvency basis deficit: $1.4 Billion

Going Concern basis Deficit: $99 Million

So knowing which figure gets added to the Balance Sheet might help to determine the impact.

Anyone have a more recent Pension Status Update??

Previously, the funded status of plans was disclosed in financial statement footnotes. For purposes of the new rule, a pension plan’s funded status is to be measured as the difference between plan assets and the plan’s projected (rather than accumulated) benefit obligation, meaning that the benefit liability will reflect assumed future pay increases, rather than simply benefits accrued to date. FAS 158 also applies to postretirement medical and other welfare benefit plans but permits these plans to measure their accumulated postretirement benefit obligation. For many companies, FAS 158 reportedly will result in reductions in balance-sheet shareholder equity.

Does that answer your question?

Eric

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Not according to LH.

Read again this part of the LH scheme.

.....the outsourcing of company pension obligations

They are getting rid entirely of any pension obligation other than current payments. If the pension plan goes south LH will not care or be liable.

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Guest rattler
Read again this part of the LH scheme.

They are getting rid entirely of any pension obligation other than current payments. If the pension plan goes south LH will not care or be liable.

Exactly my point.

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All this effort by ACE's upper management to increase shareholder value, to unlock the hidden value of all the business units.....

Most of it wiped out by a law requiring companies to show the solvency of their pension plans in their financial statements.

I imagine the race to sell ACTS, separate Air Canada the airline from ACE and distribute the remaining shares of Aeroplan must be even more pressing now this law is about to come in effect. I imagine investors such as cerberus would want to get out before share price falls.....

Any ideas of how much of a negative impact this law will have on share price dagger? Anyone?

Éric

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