Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Regulation
    • SECURE 2.0
    • Special Reports
    • Washington
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • 2023 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • The Plan Sponsor's Guide to Retirement Income
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2023 Defined Contribution East Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Canadian Pension Risk Strategies
    • 2023 Retirement Income
Breadcrumb
  1. Home
  2. ASSET OWNERS
January 09, 2012 12:00 AM

Public pension plans prepare for switch to mark-to-market accounting

Hazel Bradford
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Executives at public defined benefit plans are facing a similar fate as their corporate brethren with new accounting rules that apply mark-to-market accounting.

    As corporate pension plan executives have found, there aren't a lot of options to escape the new rules.

    The corporate world has had a few years to adjust to pension accounting rules issued by the Financial Accounting Standards Board in 2006 that put fair market value of pension assets and liabilities on year-end balance sheets, and with disappointing results, according to many actuaries.

    “It's been a major contributor to the death of defined benefit plans,” Thomas D. Levy, senior vice president and chief actuary for The Segal Co., said in a telephone interview. “In a strong market with high interest rates, spotlighting pension assets worked well. Now, it's a kiss of death.”

    Some corporate pension plan executives have grudgingly accepted the change, while others continue to resist by simply not following the new FASB standards, which are voluntary.

    “Plans generally don't like it because it increases volatility. A very small change in interest rates can have a very large impact,” said Deborah Forbes, executive director of the Committee on Investment of Employee Benefit Assets in Bethesda, Md., whose members represent more than 100 of the largest U.S. corporate pension plans with a combined $1.5 trillion in defined benefit and defined contribution plan assets. In one dramatic example, Ms. Forbes said a member company saw pension liability jump $1 billion simply from a market drop of 20 basis points. She wouldn't identify the company.

    For corporations that want to borrow money or attract investors or suitors, ignoring FASB accounting standards is not an option, particularly for those with international operations or investors that need to comply with similar accounting standards issued by the International Accounting Standards Board. They can try to reduce the shock of higher liabilities by smoothing out assets and some losses over two years.

    Bigger numbers

    In the public sector — where similar rules from the Governmental Accounting Standards Board, proposed last July and expected in final form this summer, will force pension liabilities based on fair market value into more prominent positions on balance sheets — a major concern is how those bigger liability numbers, at least under current market conditions, will affect defined benefit plan funding decisions.

    Robert W. Stewart, vice president of communications for the Financial Accounting Foundation, Norwalk, Conn., which includes both FASB and GASB, appreciates the upheaval involved but defends the group's actions.

    “Every standard-setting procedure is a balancing act,” he said in a telephone interview. “A common theme of both (FASB and GASB rules) is trying to give investors and taxpayers a clearer picture of what the liability is. It doesn't affect the reality out there. It affects the way the reality is reported.”

    As corporate pension sponsors already know, mark-to-market accounting means more volatility and uncertainty about defined benefit plans. Valuing plan assets at the end of a fiscal year “is like picking one frame out of the movie and trying to understand the whole movie,” said Leigh Snell, federal relations director for the National Council on Teacher Retirement, Sacramento.

    Public pension plan executives are particularly worried about disconnecting liabilities from funding numbers. “It will produce unfunded liability numbers that are significantly different from those used to fund the plan. It does have the potential for creating confusion about the sustainability of plans,” said Paul Zorn, director of governmental research for Gabriel Roeder Smith & Co., a Southfield, Mich., actuarial and pension consulting firm. “It will take a substantial amount of education to help people understand the reasons for the differences.”

    Mr. Zorn said public pension plan actuaries are considering ways to help public defined benefit plans keep some of the features they like from the current accounting methods, particularly reporting of annual required contributions, smoothing of assets and liabilities, and longer amortization periods, although it's too soon to tell what those ways might be. “There could be a shortage of actuaries” as public plans struggle to keep the focus on the true long-term costs and assets of their plans, he joked.

    Bigger balance sheet

    Shifting the emphasis to the balance sheet from the income sheet “is going to make for a much bigger balance sheet, and that's going to take a lot of explaining,” said Bob Scott, assistant city manager and chief financial officer of Carrollton, Texas, and board member of the Government Finance Officers Association, Chicago. Mr. Scott notes that in Texas, state law requires an annual required pension contribution figure for funding decisions, which means “there will be two sets of books. That isn't going to create a lot of confidence” with politicians, voters and potential investors.

    Public pension plan executives worry that losing the current national benchmark that the ARC provides will make it much harder to persuade public officials to make pension contributions. “We are going to be more on our own in terms of funding. That's one of the things that we're going to have to fight with the new standards,” Mr. Scott said.

    For states in rocky financial condition, Mr. Scott likens the prospect of much larger public pension liability numbers presented to elected officials to someone wanting to slim down before a class reunion. Losing 10 pounds or so is one thing, “but if you're talking about 150 pounds, you're going to get another bowl of ice cream” and let your successors worry about how to pay it.

    Public pension plan executives are prepared to go through the additional trouble and expense of having two sets of books that show the unfunded liability dictated by GASB but also continue to produce an ARC for funding purposes, because it shows the long-term funding base that public defined benefit plans need to consider, as opposed to a market snapshot in time, as well as to help investors make informed decisions, sources said. Once GASB rules go into effect in 2013, executives also expect to rely more heavily on actuaries to help them set values for assets that can be smoothed over longer periods of time.

    But public pension plans have more leeway in choosing their asset smoothing periods than the corporate pension plans do.

    Mr. Scott notes that public-sector plan sponsors have one advantage over their corporate counterparts — participants who are also often union members. “You have some very strong employee groups, and they are going to be watching closely” as funding decisions are made. Still, while the more open process of public pension funding might help stave off wholesale closing of government-sponsored defined benefit plans, he does expect changes, including a continued trend toward tiered plans that have different contribution and benefit levels for new entrants.

    Ms. Forbes of CIEBA agrees that under current conditions at least, mark-to-market accounting “is one of the nails in the coffin” of defined benefit plans. “It's frustrating because my members believe in them, and to the extent that rule changes are making it harder and harder to keep them is unfortunate.”

    Related Articles
    Mark-to-market accounting helps companies shift pension plan losses
    Accounting lessons go beyond mark-to-market
    Change afoot for public pension plan accounting
    Groups urge GASB to slow down
    UPS unwraps mark-to-market accounting policy
    GASB rules have pension execs prepping own accounting standards
    'GASB won't let me' — A false objection to public pension reform
    GASB approves new public pension accounting rules
    Some public pension execs worry new GASB rule will add fuel to fire
    GASB chairman to retire next year
    Johnson Controls moves to mark-to-market accounting
    Recommended for You
    Stack_of_Money_i.jpg
    Wilshire TUCS plans post first positive return of year in Q4
    FTX_Screen_i.jpg
    FTX bankruptcy ensnares Kraft, Och and other family offices
    ONLINE_180419851_AR_0_SWJHUISTXOVN.jpg
    Northern Trust plan universe returns -4.2% in Q3
    OCIO: Steady Hand at the Wheel
    Sponsored Content: OCIO: Steady Hand at the Wheel

    Reader Poll

    May 1, 2023
     
    SEE MORE POLLS >
    Sponsored
    White Papers
    Counting on a Crisis: A Catalyst for Investment Innovation?
    A Strategic Allocator's Guide to Productivity and Profits
    Biodiversity: why investors should care
    Research for Institutional Money Management
    Targeting Impact with Indexes
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Regulation
      • SECURE 2.0
      • Special Reports
      • Washington
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • 2023 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • The Plan Sponsor's Guide to Retirement Income
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2023 Defined Contribution East Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Canadian Pension Risk Strategies
      • 2023 Retirement Income