Changes to Ford’s pension accounting led to $2B loss in 2016

Ford Motors Company has adjusted its method of accounting for pension contributions and other post-retirement employee benefits, the company noted in a filing to the U.S. Securities and Exchange Commission last week.

As of Dec. 31, 2015, the company uses the mark-to-market accounting method, in which pension and other post-retirement employee benefits’ re-measurement gains and losses are recognized in the year they occur, rather then being amortized over many years.

For 2016, according to its filing, Ford expects a re-measurement loss of roughly US$3 billion, of which $0.9 billion is tied to U.S. pension plans, US$1.9 billion to international pensions and US$0.2 billion to its other post-retirement employee benefits globally. On an after-tax basis, the company’s full-year net income was US$4.6 billion, down US$2 billion from 2015 because of the pension and other post-retirement employee benefits changes, according to Ford’s annual report.

At year-end 2016, the underfunded status of Ford’s pension plans and other post-retirement employee benefits are expected to be about US$8.9 billion and US$5.9 billion, respectively, according to the filing, which also noted the underfunded status of these plans at year-end 2015 were US$8.2 billion and US$5.7 billion, respectively.

Read: Ford and Unifor ratified agreement includes pension, health benefits changes

“The change to the underfunded status of our pension plans primarily reflects the effect of lower discount rates, particularly in Europe where our pension plans are less funded and de-risked compared with our pension plans in the United States, and the change to the underfunded status of our OPEB plans primarily reflects the effect of lower discount rates on our unfunded OPEB plans globally,” wrote Ford in the filing.

Following prolonged contract negotiations between Ford and Unifor in November 2016, the company and union reached a tentative agreement that reinforced the economic pattern established with General Motors of Canada Co. in September and followed by Fiat Chrysler Automobiles in October. The pattern includes closing the hybrid pension plan to new hires who will go into a defined contribution plan instead; group life insurance benefit reductions will begin at retirement, effective Jan. 1, 2017; and a number of other changes to dental and paramedical benefits.

“It won’t have any effect on the pension plans in the U.S. or in Canada,” says Whitey MacDonald, auto sector director at Unifor, in relation to the US$2 billion loss. “. . . There’s no impact on the workers at all.”

Read: Ford and Unifor reach tentative agreement, averting strike action