It was supposed to be a step forward more transparency in pension fund accounting. Still it is raising more quarrels about what transparency really means and what is the right balance between disclosure to investors and a company’s need to keep costs under control. The new rules issued by the FASB (Financial Accounting Standards Board) require American employers to disclose more detailed information, in 2003 calendar year-end report, about their pension and other post retirement benefit plans.
FASB has said that its intention is to address ‘perceived deficiencies’ in disclosures about defined benefit and other post retirement plans for the benefit of users of financial statements, principally investment analysts.
There are several areas affected by the new rules. One is the information about the allocation of plan assets and expected long-term rates of return. For each major asset category, employers must disclose the percentage of the fair value of total plan assets as of each measurement date; the target allocation percentage or the range of percentages, presented on a weighted-average basis; the expected long-term rate of return for the latest period for which an income statement is presented; the range and weighted-average of the contractual maturities, or term, of all debt securities. Finally, employers must disclose the estimated future benefit payments to employees.
“We do understand the need for transparent accounting and reporting among public companies,” says Ethan Kra, chief retirement actuary at the consulting firm Mercer. “But we are also very concerned that companies do not have enough time to comply with the new rules and that compliance would be particularly burdensome. If the deadline remains the end of December 2003, it means that the new information must be included in the next annual company report, which is due by March 2004 according to the Securities and Exchange Commission. How can a multinational comply, having multiple plans in several countries?”
Kra points out that besides the timing, “a big question is: which information is really useful? If there is too much, it may obfuscate the understanding of what is really going on in a company. Other stuff may be simply misleading.”
More problems concern multinationals with pension plans in different countries. “Some of them are funded, others are not funded. In these cases how can you calculate payment projections? You will end up mixing apples with oranges. An alternative proposal is to differentiate at least mandatory and non mandatory plans,” says Kra.
Consultants at PriceWaterhouseCoopers agree that gathering all new information required by FASB will be “especially challenging for employers that use more than one actuarial firm”. They note that another difficult task will be to estimate the employer’s contribution to the pension plan for the next year: “Those estimates may differ from the actuarial valuations developed for funding purposes which relate to the plan year.” PriceWaterhouseCoopers’ consultants attract the attention also to the interim disclosure requirements: “Quarterly pension costs will need to be disclosed and public companies will need to be prepared to address any fluctuations that may result from this”.
But these efforts by FASB towards more transparency are not enough according to Ron Ryan, founder and chairman of Ryan Labs, a research company based in New York. “What is still desperately needed are three further steps. First to adopt a correct asset market value accounting where assets are not smoothed. Currently about 50% of the plans smooth assets over five years. If you remove the great years of 1998 and 1999 and replace them with 2003 and 2004, you may get a lower valuation. In fact asset growth is 14.77% for 2003 versus 21.37% for 1998.” The second step is to adopt “a correct liability market value accounting where real market yield curve rates are used: not the current one, based on long, AA corporate bonds that leads to 10-15% understated liabilities,” says Ryan. Third, companies should get rid of ROA (returns on assets) forecasts that currently allow them to enhance their EPS (earnings per share): S&P reports that about 15% of EPS come from this ROA forecast; Ryan calls them “phantom earnings”. Finally Ryan recommends to use the proper asset allocation versus liabilities: “If companies used more bonds in their asset allocation, this would lower their ROA and cause an EPS drag. On the other hand it would also reduce risk and have assets better matched to liabilities. But again liabilities is not the objective, EPS enhancement is the objective. Until this accounting procedure is eliminated, companies will continue to mismatch assets versus liabilities and create a high risk/reward trade-off.”

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