There is minimum financial or investor impact for U.S. companies switching to mark-to-market accounting practices when valuing pension liabilities, according to a new paper from SEI.
SEI looked at 23 U.S. companies that recently transitioned to mark-to-market accounting. The change from smoothing techniques has little effect on areas like analyst recommendations, credit ratings and management compensation programs, said Tom Harvey, director of the advice team within SEI's institutional group, and lead author of the paper. He added that the low impact was not surprising.
However, one thing stuck out to Mr. Harvey. Companies preparing to make the change often take a couple of years to incrementally increase funding and go to a more liability-driven investing approach to reduce volatility, but that was not the case with the firms studied, he said.
“Most of the companies haven't really changed strategies around the implementation,” Mr. Harvey said. “I would've thought more switched to LDI first.”
The transition to mark-to-market does allow companies to eliminate a drag on earnings from 2008-'09 losses that still show up on earnings statements.
“The one thing it can do is get rid of legacy losses,” Mr. Harvey said. “For most companies, that's a meaningful thing.” On average, the companies in the study that already made the switch in 2011 and 2012 had a pension fund relative to their market capitalization double that of the median of U.S. public companies. Amortization expenses were about three times higher than the average pension fund as well.
