A lot of ex-pats, especially supported ones, still have a home back where they came from. If where they came from is the U.S., last year's tax reform act has thrown a new twist into things that may alter wanting to rent out the property while you're away.

First, we have always recommended that, again for supported ex-pats, that the cost of repairing your home on return be included in your agreement. Rented or left "empty" (you'll see the reason for the quotes shortly), there will be a deterioration that needs to be dealt with.

For many of us, the home we left continues to be our "primary" residence - sort of an extension of the idea of domicile. Used to be, if one was returned to a new location, selling the old primary residence and buying a new one was essentially a tax-free event. Individuals who retired from their overseas assignment could also sell the large primary residence, move into a smaller, cheaper place and, if old enough, avoid a big tax bill. Apparently, none of this will work any more unless your primary residence was actually occupied by you for 2 of the last 5 years. Suddenly the tax man is standing at the front door with a big bill!

Again, for supported ex-pats, counting the costs of repair on return, it may make sense to keep your furniture, etc. at your old home and stay there a couple of times each year on trips with the idea of making it "occupied." Don't leave it totally empty and don't rent it out. Of course, you need to work this out with your sponsor and make sure your tax accountant is on board. If your tax-equalization includes all losses related to the assignment, your sponsor's self-interest will encourage solving the problem. If all taxes on return are yours, you may be faced with a significant reduction in the value of your assets.

In any event, deal with it now and discuss it with your advisors before it becomes irascible.

What is the "right" discount rate for the subsidiary of a firm subject to U.S. GAAP?

First of all, FAS 87 says that it must be "the best estimate" of the discount rate since the discount rate is always a "significant" assumption. Secondly, the rate "shall reflect the rates at which the pension benefits could be effectively settled."

Using methods first employed by the PBGC, FAS 87 analyses the total pension benefit promise in two pieces; (i) the annuity piece and (ii) the piece representing the period till the annuity begins. For the annuity piece, FAS 87 suggests looking to "rates implicit in current prices of annuity contracts." One should "look to rates of return on high-quality fixed income investments currently available and expected to be available during the period to maturity of the pension benefits" for the piece representing deferment.

The typical retirement benefit in Japan is a lump sum, even when an annuity is available, the annuity will frequently be defined relative to the lump sum and not the other way around, as it is in North America. This shortens the duration of the first part, the annuity piece, of the discount rate to zero. As in all situations requiring apparent division by zero, one must look elsewhere for a rate.

In those rare situations where the annuity benefit is required, what can one do? We are confronted with a new singularity - namely that there is no market for annuities in Japan. However, if there were one, the premiums would probably be prescribed in a similar fashion to premiums for other products. Up until recently, premiums were calculated at 5.5%. They have now been permitted to drop.

The deferral period also presents a problem. FAS 87 was not written with foreign environments in mind. Moody's has apparently downgraded Japanese government debt, does this mean that Japan's debt is not "high-quality?" Most companies required to apply FAS 87 are subsidiaries of American companies that have access to such investments in the United States. In Yen, these investments have absolutely soared over the past two years -- the relatively high interest rate combined with the foreign exchange appreciation. To the extent that a company is not bound by any investment restrictions, retirement plan assets could be invested in U.S. securities.

Finally, what's the impact? A full-blown study of the investment market will cost more than the total cost of a retirement plan valuation, such a study would not be cost-effective except for the largest of organizations. Analysis of the actuarial reasons for the change in the net periodic pension cost we provide with our reports shows a 1% change in the discount rate leads to a 10% to 20% change in the net periodic pension cost before recognition of the impact of amortization and deferral. For companies where the entire NPPC is barely material, is a fine-tuning of the discount rate appropriate?

You have been reading the online edition of LIA $FACTS$, the monthly fax newsletter of Lohmann International Associates. For further information, please visit our home page on the Web or send e-mail to Les Lohmann.

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