The Markets November 30, 2012

Transparency of Liabilities a Growing Trend

The trend toward more transparency of plan assets and liabilities seems to be gathering momentum.
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Since December 2010, companies like Honeywell, AT&T, Verizon Communications and UPS announced mark-to-market recognition in the corporate earnings statement of pension gains and losses, creating a more transparent representation of the economic cost of the pension plan in their income statements by marking to market their funded status immediately without smoothing. The U.S. Financial Accounting Standard Board (FASB) requires employers to recognize the full value of their funded status on balance sheets, with a deficit shown as a liability. The “new FAS 87” method increases the P&L cost immediately whereas “traditional FAS 87” increases P&L cost gradually through amortization.

These four corporations’ moves to mark-to-market accounting coincided with the International Financial Reporting Standards (IFRS), an initiative that simplifies the way pension income or loss is recognized by publicly traded companies outside the United States.

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Because it is in most companies’ interests to have a consistent approach to accounting, it seems that mark-to-market accounting will reach a tipping point, said Bob Collie, chief research strategist for Americas Institutional, Russell Investments, in research about the $20 billion club—Russell’s name for the 19 U.S. listed corporations with worldwide defined benefit pension liabilities in excess of $20 billion. If other companies follow suit, analysts will come to expect mark-to-market figures, he said.

“I don’t think it would take much for the trend to continue,” Collie told PLANSPONSOR, adding that the change in international accounting standards could prompt the U.S. to converge with this method.

However, some companies are hesitant to adopt mark-to-market accounting because of volatility, Collie added.

One of the biggest advantages of mark-to-market accounting is transparency, said Karin Franceries, executive director of J.P. Morgan’s Asset Management Strategy Group. “The simplification of accounting makes the link between the pension fund and plan sponsor clearer,” she added.

(Cont’d…)

The Impact of Accounting on Asset Allocation  

Accounting methods also have a direct impact on asset allocation. By using mark-to-market, it is easier to derive the impact of a company’s asset allocation because it is immediately translated in its pension cost, Franceries said.

Under the new FAS 87 accounting method, the expected return on assets is not reflected in the annual report. Without smoothing, the full impact of the deficit will show up on a company’s books immediately in the year it occurred. A higher deficit increase triggered by a riskier allocation would result directly in a greater loss, according to J.P. Morgan’s research paper, “The mark to market treadmill.”

Because reporting under the new FAS 87 method mirrors what is actually happening to a pension fund, it allows a CFO to focus on the economic reality of funded status.  Investment solutions that stabilize pension costs on the income statement under the new FAS 87 approach will be similar to those that stabilize liabilities on the balance sheet, the paper said.

J.P. Morgan’s paper provides a real-life case study showing what affect asset allocation would have on pension reporting.  The paper can be accessed here.  

Russell Investments’ research paper, “A busy pension year so far for the $20 billion club,” is available here.

Deals & People November 30, 2012

Lincoln Expands Plan Sponsor Experience Team

Lincoln Financial Group Retirement Plan Services expanded its Plan Sponsor Experience Team. 
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Cynthia Brueckman, Jesse Coleman and Lee Ann Smith joined the firm as client relationship managers. In addition, Matt Goodman has been promoted to director of client relationship management and Brad Carman to relationship manager of the Plan Sponsor Experience Team.

Brueckman has worked in the retirement industry since 1995 as a retirement plan consultant, relationship manager and an account executive. She comes to Lincoln from Register Financial Advisors LLC where she was a senior client relationship manager. Brueckman earned a bachelor’s degree from Rochester Institute of Technology and an ABA certificate in paralegal studies from Fairleigh Dickinson University. She maintains her FINRA Series 6, 7 and 66 and Georgia life, health and variable products licenses. She also holds the Qualified Plan Financial Consultant (QPFC) designation from the American Society of Pension Professionals & Actuaries (ASPPA), and is a member of ASPPA and National Women in Pensions.

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Coleman brings more than 17 years of retirement industry experience in the areas of corporate, third-party administration, banking and financial services. He previously was a relationship manager at Wells Fargo Bank. Coleman has a bachelor’s degree in human resources from SUNY Buffalo and an MBA from Mercer University. He maintains a FINRA Series 6 and is a Certified Retirement Services Professional.

Smith has more than 12 years of retirement industry experience in the areas of client services management, investment support, product support, vendor management and implementation. Her most recent role was senior relationship manager at SEI Global Institutional Group. She holds a bachelor’s degree in economics from Purdue University and maintains FINRA Series 6 and 63 licenses.

Goodman has been with the company for more than 10 years and has held positions in both implementation and client relationship management. He most recently served as a senior relationship manager. Carman most recently served as senior retirement consultant and in his new role will focus on retention, customer satisfaction and overall growth and profitability.

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