SPARKS, Md. -- McCormick Co. Inc. changed the manner in which it calculates its pension expense and boosted the company's earnings.
The change resulted in a $5 million gain in the second quarter, according to a company official.
McCormick's contribution to the $141 million pension plan and its payment to beneficiaries are unaltered by the change, according to company officials and outside actuaries.
But the found money accrues to the company's bottom line, said Robert Olstein, a money manager who scrutinizes a company's financial statements before he invests.
"It helps their earnings," said Mr. Olstein, chief investment officer of Olstein & Associates of Purchase, N.Y., which manages $340 million, none invested in McCormick shares.
"In this day and age, they (management) were probably spooked by the prospect of not meeting an analyst's earnings estimate," said Mr. Olstein, offering a possible explanation for the change.
"It's an immaterial number," said Christopher Kurtzman, vice president and treasurer for McCormick. "It was not a major earning impact."
The McCormick pension staff changed the calculation because the new method was a more accurate representation of the value of the pension fund's assets and it is more widely used. Also, McCormick's actuary, William M. Mercer Investment Consulting Inc., recommended the pension staff make the change.
Mercer representatives declined to comment.
"If they are getting into a new situation where they are helping a new client, they are certainly recommending that they are going to this method," said Mr. Kurtzman. "We are just transitioning to a method that is used by a lot of companies to start with," Kurtzman said.
The two basic methods for valuing a plan's assets are market value and market-related value.
Market value is the market's value of the plan's assets at a point in time. Market-related value is related to market value but allows the company to spread gains and losses over a period of time -- five years in the case of McCormick.
When Financial Accounting Standards Board Statement 87 -- Employers Accounting for Pensions -- was adopted in 1986, it gave pension fund officers a choice between a market-related or smoothing approach to valuing the assets or a market value, said Ken Steiner, an actuary with Watson Wyatt Worldwide, Chicago.
"A market-related value approach will produce a relatively stable pension cost from year to year," said Mr. Steiner -- but it also underestimates the assets' values in a rising market.
"They (McCormick) had accumulated gains that they were not getting credit for," said Joel I. Rich, senior vice president with New York-based Segal Advisors Inc.
Mr. Kurtzman acknowledged as much. "The market has been positive and we have had gains," he said.
McCormick will continue in the market-related vein, but will use a more preferable calculation method.
"There are an infinite number of ways to use market-related value method," said Charles Carr, consulting actuary with Southern Actuarial Services Co. Inc., Atlanta. "You could use it for only certain assets.
"You can do it for everything except stocks," he said. "But it has to relate to market value in some way."
McCormick had deferred and amortized all gains and losses over a five-year period, said Mr. Kurtzman. Now, gains and losses different from expected returns are deferred and amortized, also over five years.
"That is more common and less volatile," said Mr. Kurtzman. "It represents a better reflection of current market value and it reduces volatility in the pension expense going forward."
