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Mark-to-Market Pensions Show Brutal Year

A growing number of companies are reporting the fair value of their retirement plans promptly rather than smoothing the results over years.
Tommy Fernandez , CFO.com | US
February 17, 2012

Like deciding whether to pull a bandage from a newly healed wound, CFOs are trying to figure out the best way to disclose the havoc done to their corporate pension plans by yet another brutal investing year. As with pulling the bandage, they seem to have two reporting options: fast and painful or slow and onerous.

At a growing number of companies, CFOs have decided to yank off the dressing.

For example, United Parcel Service announced recently that it has adopted the mark-to-market method of pension accounting. It joins such other companies as Honeywell International, AT&T, IBM, and Reynolds American.

Mark-to-market is fast, recording major gains and losses that hit UPS's benefit plan during the year they occur, in comparison with the slower, more conventional amortization process, which spreads the impact over several years. But it can also be painful. During the fourth quarter of 2011, the company had to post a pretax charge of $827 million, reflecting the year's fund deficits. UPS will face the risk for earnings volatility every fourth quarter going forward.

In a statement issued to CFO, UPS said the change will align the company's accounting with fair-value principles and "result in simpler, more transparent financial reporting."

"While the smoothing approach [via amortization] can be said to reduce volatility, it does not offer a transparent view of what actually happened in any given year to your pension plans," wrote a UPS spokesperson.

Indeed, ferocious regulatory appetite for transparency is one factor behind the growing mark-to-market trend, which also includes the telecoms Verizon Communications and Windstream. Windstream announced its move last week as well.

Standards-setters have been busy on the subject. In September, after five years of research, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-09, "Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer's Participation in a Multiemployer Plan." While the new rule doesn't outright require mark-to-market, it substantially increases pension-disclosure requirements for fiscal years ending after December 15, 2011. Enhanced requirements include data on employer contributions, expiration of minimum funding arrangements, and the plan's "zone status" under the Pension Plan Act of 2006: red (critical), yellow (endangered), or green (neither). If zone status is not available, the company has to disclose whether the plan is funded less than 65%, between 65% and 80%, or at least 80%.

Last June the International Accounting Standards Board issued its revised International Accounting Standard 19, "Employee Benefits," which does indeed require mark-to-market for pensions after January 1, 2013. Experts say it's only a matter of time before the standards-setters converge on the issue, which is already under consideration by the Securities and Exchange Commission.

"The new international standard, it's just pure mark-to-market," says Peter Bible, partner-in-charge of the audit and Securities and Exchange Commission practices at the New York accounting firm EisnerAmper. "A lot of companies feel this is what the rest of the world wants, so they are thinking about changing their accounting methods and even reducing or possibly eliminating their recognition corridors."

Mark-to-market also offers CFOs the chance to release themselves from years of further earnings deflation, hopefully by biting the bullet in just one fiscal year. Last year was particularly brutal for pension funds: thanks to low interest rates, the 100 largest pension funds in the country lost $236.4 billion, leading to a record deficit of $464.4 billion, according to the Milliman 100 Pension Funding Index.

A spokesperson for AT&T says the accounting change has "made it easier to forecast expenses, including year-end adjustments, since there is no more complicated smoothing of gains or losses."

Nonetheless, the heightened risk for earnings volatility can complicate matters for researchers uncomfortable with sharp earnings shifts. Mark-to-market was notorious for this during the financial crisis of 2008. Some analyst groups, like the Deustche Bank team led by Justin Yagerman, have applied mark-to-market in their own analyses since 2007. They expressed approval for the UPS change in a recently issued research note. However, experts warn that not everyone will be ready for this.

"Some people will get this," says EisnerAmper's Bible. "Others won't."

John Hepp, a partner in the national office of Chicago-based Grant Thornton, urges CFOs to remember that pension funds are very different from the other assets and liabilities on their financial statements. For instance, the funds aren't really owned by the company and the liabilities usually are measured in decades - sometimes requiring an actuarial point of view.

"Do you really want to take down random fluctuations from one particular day, or event, or year?" asks Hepp. "You have to be careful how you look at these things."

Tommy Fernandez is a freelance writer based in Brooklyn, New York.




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