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.