Fri Dec 30, 2011 11:36am EST (Reuters) - Tom Adams, chief financial officer of cigarette-maker RAI Inc, will be keenly focused on the stock market on Friday, not with his company's share price in mind, but rather with the fate of his pension plan's portfolio.

For the first time, the assets in RAI's $5-billion worker pension plan will be "marked to market," or revalued based on Wall Street's end-of-the-year prices.

Like a growing number of Fortune 500 corporations, RAI — maker of Camel, Kool and Pall Mall — has adopted "mark to market" pension accounting. Other converts include technology group Honeywell International Inc, chemicals manufacturer Ashland Inc, and communications giants AT&T Inc and Verizon Communications Inc.

For companies using this new math, the values of the holdings in their old-style, defined-benefit pension plan investments will be tallied up on the last day of the year.

If returns are below projections — and most will be this year — the difference will add to the company's "unrecognized losses." Benefit obligations are also rising due to low interest rates this year. That increase, too, will go in the losses pile.

Under traditional pension accounting, the impact of those losses would be spread over many years. Under mark to market, more of the losses, and in some cases all of them, will be recognized immediately. So, a few points up or down in the market can mean many millions of dollars to the bottom line.

Why are companies like RAI making the shift?

Mark-to-market gives some companies an instant profit boost by removing the drag of billions of dollars in old pension losses from current and future results, said UBS accounting expert Janet Pegg in a November report.

RAI, for example, will avoid a $1.5 billion hit to profits over the next decade, by changing its accounting.

That's one reason Pegg and other analysts expect that the list of companies making the mark-to-market switch will grow.

The approach also brings companies closer to international accounting standards for pensions, which will become effective in 2013. Those rules are close to what mark-to-market companies are doing in the United States, though some of the accounting technicalities differ.

Sustained, ultra-low interest rates may be another reason companies like RAI are considering making this move now, said Stewart Lawrence, a senior vice president with pension consultancy Segal Co.

At some point, rates will rise. When that happens, pension plans will require less funding. The rates are used to calculate the cost today of future pension promises. Lower rates mean having to sock more money away for the future.

If rates rise significantly, companies that mark their asset values on the last day of the year could get a pension-driven boost to earnings, Lawrence said. That gain would come all at once, instead of being spread over many years.

For RAI, a one percent increase in the discount rate, for example, would reduce its pension liability by as much as $600 million, according to the company.

So if mark-to-market pension accounting is so great, why aren't more companies adopting it? Mainly because it means more volatility in pension fund assets and corporate profits.

This year is "going to be a bad year no matter what," said Standard & Poor's analyst Howard Silverblatt.

For companies like RAI recognizing investment losses on December 30, he said, "there are some benefits from an accounting point of view, but the volatility is dangerous also."

Poor recent investment returns and low rates created large pools of deferred losses in pension plans coming into 2011. The continuation of these trends this year made the situation worse.

(Reporting By Nanette Byrnes in Chapel Hill, North Carolina; Editing by Kevin Drawbaugh)

© 2010 Thomson Reuters. Click for Restrictions.

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