Human Capital & Careers

Pension-Disclosure Trap Looms

Are some CFOs late in recognizing the demands of meeting an April 30 compliance deadline?
David McCannApril 22, 2009

New disclosure requirements for defined-benefit pension plans could pose problems for CFOs not paying close attention, a benefits attorney told

Time is running out to get a handle on an amendment to the Pension Protection Act of 2006 that requires plan sponsors to describe an investment policy and a funding policy for their plans, among other new disclosures they must make. The disclosures must be included in notices to plan participants, their beneficiaries, labor organizations, and the Pension Benefit Guaranty Corporation by April 30, except for plans with fewer than 100 participants, which have at least three more months.

The new Annual Funding Notice (AFN) is a replacement for the Summary Annual Report, which was a fill-in-the-blanks form that stated basic information like plan assets, liabilities, and expenses, noted Dodi Walker Gross, a partner in the executive compensation and employee benefits practice group at the law firm Reed Smith.

While CFOs usually weren’t involved in preparing the old notices, the nature of the newly required disclosures and of the AFN form suggests that they should be involved now, according to Gross. “But I’m not seeing much evidence that they are focusing on this,” she said. “They may be aware of the new requirements but may not have heightened sensitivity that making the disclosures is more than just filling in the blanks.”

Describing the plan investment and funding policies is problematic because the Labor Department has given no guidance on what these disclosures should include. “Many plans have formal investment policies that can run 20 or 30 pages, so the question is, what is it from that policy that you are supposed to disclose?” said Gross.

She compared the new pension-plan disclosure requirements to the Compensation Discussion & Analysis section of company proxy statements that the Securities and Exchange Commission began requiring in 2007. While the SEC gave somewhat more guidance then than Labor is giving now, norms for what to include in the CD&A did not begin to take shape until after the SEC sent comment letters in October 2007 to 350 companies that it deemed to have provided insufficient disclosure.

Here, the SEC, the Labor Department, and the IRS are all likely to eventually weigh in on compliance. But even beyond the regulatory oversight, the stakes for companies could be high. For example, lenders are likely to look closely at the AFN when determining a company’s creditworthiness, and lawsuits could even result from a carelessly prepared notice, Gross claimed.

These problems could arise from using the Labor Department’s model AFN form — which companies are motivated to do, because the department has said it will treat those that do as having complied (although, as Gross noted, that is not a reprieve from the responsibility to make accurate disclosures).

The model form has an asset allocation chart that lists 17 categories of investments and asks plan sponsors to say what percentage of plan assets are invested in each one. But the chart creates significant potential for painting an inaccurate picture, Gross said.

For example, one of the categories is, “Value of interest in registered investment companies (e.g., mutual funds).” But there is, of course, a range of risk in mutual funds, depending on the kind of stocks and bonds they’re invested in. “They’re pigeon-holing you into these categories that may not be clearly reflective of the true asset allocations,” she said.

That makes it very important to take care in describing the investment policy. “You don’t want someone suing you because your investment policy says you’re doing one thing and your asset allocation makes it look like you’re doing something else,” she said. If there is anything that could be viewed as a difference between the policy and the investment chart, the CFO should make sure that language reconciling that difference in some way is included in the investment policy description.

Meanwhile, CFOs also should be on top of a new requirement to state a “funding target attainment percentage,” which is the value of plan benefits, or liabilities, at the beginning of the year divided by plan assets. “This is the new standard by which the funding status of a plan is determined, and it is a big deal,” Gross said.

That’s because onerous restrictions are triggered if assets fall below 80% of liabilities, and worse ones kick in if they fall below 60% of liabilities. The restrictions range from an inability to improve plan benefits, to a prohibition on paying out certain lump sums, to an outright freezing of the plan.