Mr. Fabozzi proposes:
• requiring corporations to conduct annual risk-based evaluations of their pension plans that would link pension assets, liabilities and their ability to pay off unfunded liabilities;
• banning actuarial smoothing, a popular accounting technique whereby corporations, on their balance sheets, can spread out strong returns in a good year to offset poor returns in a bad year; and
• imposing higher PBGC premiums on corporations that have consistently demonstrated an inability to fund their pension plans in accordance with ERISA. The PBGC is already considering imposing risk-based premiums and other reforms.
"Why should this be a surprise to anyone that there is a crisis right now?" Mr. Fabozzi said in an interview. "I think there should be an entirely separate set of financial statements that clearly states what impact a pension fund has on a company's balance sheet."
Scott Sprinzen, an analyst at Standard & Poor's who focuses on pension plans, was reluctant to endorse at least one of the paper's proposals. "I think … (analysts) are of mixed minds about banning actuarial smoothing," he said. "We highly value current information. On the other hand, however, marking to market the assets and liabilities of a pension plan leads to volatility that obscures operating performance. From our perspective, some middle ground needs to be created between the two."
Michael Peskin, managing director and head of the Global Asset Liability Group at Morgan Stanley Inc., New York, agreed with Mr. Fabozzi that smoothing should be banned.
But he cautioned that in order for a ban on smoothing to work without creating an inordinate amount of volatility in pension returns and actuarial assumptions, corporations must change their pension investment policies. Mr. Peskin, who has presented pension research to Congress, said that ERISA plans in the United States should consider immunizing their portfolios by matching their liabilities to long bonds. "The reason pension plans are not doing that is because most people believe that interest rates are going to increase, and because it would represent a hit on their corporate earnings sheet," he said.