The tiny change that made AT&T almost $8 billion

When it comes to pensions, a guess about a fraction of a percentage point can be worth billions of dollars to big corporations.

On Jan. 22, 2014, telecom giant AT&T posted a $7.6 billion pension-related gain for the fourth quarter. Most of that came from simply changing its assumption about the discount rate on its retirement plan to 5 percent from 4.3 percent.

But just a year earlier, it posted a massive pension loss after lowering its assumption.

So what changed?

While extremely complicated, the simple version of the discount rate in this case is this: the rate companies use to calculate the present value of their future retiree obligations.

In other words, how much you need today to pay your retirees' pensions tomorrow.

Mark-to-Market Accounting: CNBC Explains
Mark-to-Market Accounting: CNBC Explains   

Pensions having to account for discount rates is nothing new. What has changed, though, is how often they do it.

Many plan sponsors, like AT&T and Verizon, have switched to what is known as mark-to-market accounting. This means they have to adjust their assumptions to match market conditions.

Most choose to do so yearly, which means in a good year the discount rate assumption rises, and in a bad year it falls.

That can lead to huge annual swings, which flow through to the income statement immediately, rather than over a period of years. But as asset management firm SEI said in an October 2013 paper, many analysts were already modeling corporate pensions on a mark-to-market basis anyway.

"The companies might be adopting mark-to-market accounting to avoid confusion by simply recognizing that methods of smoothing are ultimately removed in an analyst's review," the firm said.

By Ben Berkowitz, deputy managing editor news,