In a study just released, global outsourcing and consulting firm Hewitt Associates found that pension shortfalls, pension regulations, and pension accounting are high on CFOs’ lists of concerns these days.
More than half of the CFOs and treasurers at the 174 midsize to large companies in the survey said they will need to fund a pension liability this year. Only 8 percent are considering terminating their plans because of liabilities, however.
“One of the reasons for current concern is that contributions are driven by the 30-year Treasury rate, which is no longer issued,” said Mike Johnston, Hewitt’s North American practice leader for retirement and financial management.
As a result, the rate has become artificially low, causing an excessive assessment of pension liabilities and overstating the need for contributions. Congressional action is required to change the discount rate. Once the rate is adjusted, Johnston believes, pension liabilities should be more manageable.
Interestingly, Hewitt’s study found that just 4 percent of executives have canceled programs to convert their traditional company plans to cash-balance plans. Some observers thought the threat of legislative and regulatory challenges might have many companies backing off such plans.
The decision whether to convert has been a hot topic of late. The Treasury Department recently introduced a proposal that would allow companies to convert their traditional plans to cash-balance plans. But the proposal touched off a whole lot of controversy.
Shortly after officials at the Treasury Department announced their intention, Reps. George Miller (D-Calif.), Bernie Sanders (I-Vt.), and Rahm Emanual (D-Ill.) introduced a bill in the House of Representatives requiring Treasury to nix the proposal. The House bill also gives managers the option to offer workers age 40 or older and those with at least 10 years of service at a company the opportunity to decide whether they want to stay in a defined benefits program or switch to a cash-balance plan.
Hewitt’s research certainly highlights corporate concerns about pension funding. More than 60 percent of the respondents believe that pension cost volatility is either a major problem or a serious concern Although Hewitt is advising its clients to reassess their asset mix in light of recent market volatility, more than two-thirds of respondents said they aren’t contemplating changes in their pension investment allocations despite market conditions.
“While there is some suggestion that companies will increase their allocation to fixed-income securities, we’re not expecting a significant shift from equities to bonds when stock prices are low and bonds are high,” noted Johnston. “In the long run, the return on equities is still likely to be higher.”
If FAS 87—which governs how pension income and expense are accounted for and disclosed in a company’s financial statements—is superseded or revised, nearly 63 percent of the finance executives surveyed believe that pension expenses should reflect investment experience on a smoothed basis.
Nearly half think that the balance sheet should reflect the funded status of pensions on a direct market value basis showing both over- and underfunded positions. Thirty-seven percent said the balance sheet should reflect some amortizations and deferrals.
Siebel Hears from SEC—Again
Software maker Siebel Systems received a Securities and Exchange Commission inquiry late last week. The reason for the probe? A possible violation of Regulation Fair Disclosure, which aims to prevent companies from selectively disclosing material financial information.
The SEC passed Reg FD in October 2000 to put an end to private corporate briefings for analysts. Such briefings were thought to give analysts an edge over individual investors.
In November, Siebel, a customer relationship management specialist, became the first company to agree to pay a fine to settle a Reg FD case. Under the terms of its settlement with the SEC, Siebel paid $250,000, while pledging not to selectively disclose information in the future. The company admitted to no wrongdoing, however.
In that case, the SEC said company founder and CEO Tom Siebel disclosed material, nonpublic information to guests at an invitation-only technology conference hosted in November 2001 by Goldman Sachs in California.
Executives at Siebel said SEC regulators contacted the company after CBS MarketWatch published an article in early May that raised questions about the company’s Reg FD compliance. The article alleged that Siebel’s stock price gained 8 percent on heavy trading volume just one day after Siebel CFO Ken Goldman spoke to a small group of financial analysts and investors at a cocktail party.
According to Reuters, an audit committee of Siebel’s board of directors is reviewing its compliance with applicable laws and company policies. An attorney has also reportedly been hired in connection with the review.
Hedge Funds under the Microscope
In other SEC news, the commission will hold meetings this week to further discuss its investigation into hedge funds, which was initiated by former chairman Harvey Pitt in May 2002. At the time, Pitt wanted to look into hedge fund fraud, conflicts of interest arising from hedge funds running mutual funds, and the growing availability of hedge funds to retail investors.
In the initial phase of the investigation, the agency sent out a questionnaire to hedge funds and Wall Street firms regarding securities pricing policy, commissions, and details about hedge fund managers.
In the latest phase, the commission will hold panel discussions on a variety of issues, including the structure and operation of hedge funds, hedge fund marketing, investor protection, trading strategies and market participation of hedge funds, and current regulation. Among the panelists: David Swensen, head of Yale Endowment and a leading hedge fund investor; Paul Roth, senior partner at New York law firm Schulte Roth & Zabel, which represents many leading hedge funds; George Hall, whose Clinton Group is a successful hedge fund; and Duke University’s David Hsieh.
SEC chairman William Donaldson argued that the agency has to take a closer look at hedge funds since they constitute a $600 billion industry—with few regulations governing it. Reportedly many lawyers expect the SEC to require some hedge funds to register as investment advisers.
Registration would allow the SEC to perform periodic surprise audits on hedge funds. It would also require hedge fund principals to file a professional history, according to Reuters.
Some SEC-watchers think it’s more likely that the commission will require registration only for those hedge funds that deal with retail investors, while giving a pass to those that service wealthy investors and institutions.
New Hire at Oversight Board
The Public Company Accounting Oversight Board named Thomas Ray, a partner at accounting firm KPMG, as deputy chief auditor. In his new role, Ray will work closely with the board’s chief auditor, Douglas Carmichael, a fierce critic of the accounting industry.
Before joining KPMG, Ray oversaw auditing and attestation standard-setting efforts at the American Institute of Certified Public Accountants.
Improving and issuing new auditing rules is a crucial task ahead of the accounting board, which recently voted to take back that role from the AICPA. The board, which was created by the Sarbanes-Oxley Act and declared operational by the SEC late last month, is now rushing to beef up its staff.
• A new survey by Deloitte & Touche’s worldwide security services group presents a rather grim picture of the state of security at some of the world’s biggest finance companies. Nearly 40 percent of the global financial-services companies surveyed conceded they had experienced a major cyberattack within the past year, while only 5 percent of these organizations said they were “extremely confident” their network systems were well protected against even an internal security breach. What’s more, the majority of respondents dedicate only 6 percent of their overall IT budget to security technologies.
• Former Tyco International finance chief Mark Swartz has received court permission to tap his investment accounts to pay federal and state tax bills totaling $12.7 million, according to Reuters. Court papers show that last month, Swartz received approval to pay $10.5 million to the federal government in connection with his 2002 and 2003 personal income-tax obligations. He owed another $2.2 million to the state of New York for 2002.
Last September a New York grand jury indicted Swartz and former Tyco chairman Dennis Kozlowski on charges they looted $600 million from the company through unauthorized pay and fraudulent stock sales. In February a New Hampshire grand jury indicted Swartz on a single count of tax evasion, accusing him of filing a federal tax return that failed to report a $12.5 million bonus he received from Tyco in 1999. The charge says he also evaded nearly $5 million in federal income tax on his tax return for 1999. Swartz’s New Hampshire trial is set for July 8, and the New York trial is expected to begin in September. Swartz has pleaded not guilty in both cases.