Is Your Trust Department Ready for FAS 106? as a New Standard for Calculating Postretirement Health Benefits Takes Effect, Experts Weigh the Implications for Trust Bankers

By Arend, Mark | ABA Banking Journal, January 1993 | Go to article overview

Is Your Trust Department Ready for FAS 106? as a New Standard for Calculating Postretirement Health Benefits Takes Effect, Experts Weigh the Implications for Trust Bankers


Arend, Mark, ABA Banking Journal


A new source of business is emerging for trust departments, thanks to a December 1990 rule issued by the Financial Accounting Standards Board. The rule, FAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, calls for corporations to change the way they account for postretirement health care and welfare benefits.

Until now, most employers accounted for such services on a pay-as-you-go basis. FAS 106 mandates that companies change their accounting practice to an accrual basis, which requires them, in effect, to estimate the cost of providing health insurance coverage to employees who may not retire for many years--and to account for that cost in the present. For most companies, the rule takes effect in the first quarter of 1993, when earnings are to be reported using accrual accounting for postretirement benefit costs.

Figuring those costs is only half the battle. The issue of whether or not-- and how--to fund those costs is the dragon most corporate finance officers will soon look to their trust bankers to help slay. While some companies have already begun funding for postretirement health-care coverage, most are not there yet and are still studying ways to assess the cost of doing so. Thus both analysis of the rule's implications and the actual establishment of postretirement trust accounts represent new business opportunities for Trust.

To help trust bankers assess the potential, ABA BJ Associate Editor Mark Arend interviewed two FAS 106 experts: Fred Morris, senior vice-president, State Street Bank & Trust Co., Boston, and Steve Harrold, a vicepresident in the Atlanta office of Towers, Perrin, Forster & Crosby, Inc., a national accounting and consulting firm. The following responses, edited for clarity, were presented in separate interviews.

ABA BJ: Are your corporate clients currently preparing to fund their postretirement health benefits?

Morris: In many cases, corporations haven't analyzed the situation yet. Those companies are waiting to see what everyone else is doing. I think that when they start reporting their results using FAS 106, people will become much more excited about minimizing that liability by funding it. Until then, they really aren't under any immediate pressure to do something, particularly if their competition isn't doing anything.

Harrold: The principal concern of most of our clients is the extent of their liability. Their second concern is how to manage that liability. I suspect that most organizations have figured out the extent of their liability by now. They want to see what they can do to decrease the costs of FAS 106.

ABA BJ: Have any companies already chosen to fund FAS 106 costs rather than amortize them?

Harrold: Some companies have begun to fund their retirement obligations, most notably in the utility industry. Regulators don't typically allow the utilities to put into the rate structures things that they don't fund.

ABA BJ: Will other industries soon follow suit?

Morris: A recent survey by A. Foster Higgins & Co. [a New York-based actuarial firm] asked American companies whether or not they would fund, and 20% said they had plans to fund, 30% said they were considering funding, 20% said they would not fund, and 30% said they were considering it, but were not likely to fund.

Harrold: It would surprise me if there were a lot of funding business in the first couple of years. I think corporations will deal with the accounting issues first and then think more about the actual funding.

Nevertheless, it is incumbent on the trust officers of the bank to be aware of this and to let their trust customers know that they're ready for the funding tasks when their customers are.

ABA BJ: How do companies calculate the cost of medical and welfare benefits years into the future?

Morris: The odds are that a 40-year old will retire when he is 59, 19 years later. …

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