New reporting trend may ultimately put pain in rearview mirror

Bart Pushaw

A new trend for reporting retirement plan numbers may be on the horizon, according to a Pension Risk Matters post by Susan Mangiero, based on a recent report in the Wall Street Journal, “Rewriting Pension History”.

It’s simple enough in concept, calling for earnings reports each year to reflect more accurately the full extent of liabilities and surpluses for that year, rather than “smoothing” sizeable gains and losses from retirement plan assets across longer periods.

Mangiero writes:

Cynics might describe this strategy as a “big bath” approach. Report pain all at once and therefore be able to report higher earnings the following year. On a more benign note, companies may simply want to provide more transparency to their investors, especially at a time when lots of questions are being asked about the costs associated with providing retirement benefits to current and past employees.

The Wall Street Journal article notes:

… the accounting change will make it clearer to investors how pension plans’ performance affects the companies’ income statements, where it is factored into operating earnings. And the current rock-bottom interest rates make it a good time to make such a change. Any increases in rates could improve pension-plan performance, and clearing away the old losses will heighten the impact that better performance has on the companies’ earnings.

Mangiero’s post and the Wall Street Journal article raise two important points about reporting. First, there is potential for differences between actuarial numbers and current year numbers, and second, it might make sense to separate pension reporting from earnings reporting.

Moreover, as international standards continue to converge with US GAAP protocols—often with GAAP giving way to the international standards—it’s possible that this represents the front edge of a new approach to reporting on retirement plans, one that may well be in place within three years.

High-level points to take away:

  • The new approach would enable retirement plan sponsors to take hits to earnings for bad years all at once, afterward putting it behind them for good
  • Earnings would be automatically increased, and expenses decreased, for future years
  • With interest rates expected to go higher, the resulting gains will show up as income in earnings
  • Retirement plan sponsors could implement liability-driven investing (LDI) in order to avoid the significant mark-to-market hits that are expected in the future
  • As a matter of common sense, if this is ultimately the likely direction of accounting rules changes anyway, it makes sense to implement sooner rather than later

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