Accounting Rulemakers Ponder 'Mark to Market' Approach

April 20, 2004 ( - The sometimes controversial accounting practice of "smoothing" a traditional pension plan's finances to level out its economic peaks and valleys may be a thing of the past.

That’s because U.S. and international accounting rulemakers are set to consider whether to add to their list of projects a study of whether to adopt a mark to market standard of pension accounting instead, Dow Jones reported. The issue is scheduled to come up this week at a joint London meeting between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).

Although potential adoption of a mark to market rule is uncertain, the effort has already become an emotional hot-button issue for actuaries, pension advisers and chief financial executives, who complain it would make financial statements far more volatile. “Opening up pensions is likely to be at least as controversial as the project to expense employee stock options,” Pat McConnell, an accounting analyst at Bear Stearns, told Dow Jones.

For the last 20 years or so, employers have used smoothing to amortize pension gains and losses over a period of several years to tinker with their financial statements to level the hills and valleys their plans may experience. As a result, investors have little sense of how a corporate pension plan – which can be worth billions of dollars – is faring in the markets, and how it may be affecting cash flow.

If a mark to market standard were to be ratified, the project could ultimately result in profound changes in the way companies account for traditional retirement plans.

Opposition Grows

Though companies haven’t yet declared war on marking to market, a number say they don’t like it. For example, General Motors, which sponsors the largest private pension plan in the U.S., argues that it’s not appropriate to take the approach, given that pensions are long-term investments that don’t live or die on market fluctuations in the short term.

“We do not believe that marking to market pension assets would be appropriate, because it would introduce volatility into the income statement and provide less clarity to investors,” GM spokesman Jerry Dubrowski told Dow Jones.

Besides, a wide-ranging report published recently by the Committee on Investment of Employee Benefit Assets, an employer group, said the possible shift to a mark-to-market approach is one of several factors that could push companies to phase out traditional retirement plans. And Barry McInerney, who heads the U.S. practice of Mercer Investment Consulting, a unit of Marsh & McLennan Cos. (MMC), wrote in a recent paper that the change could prompt a stampede by pension plans out of equities and into bonds.

In fact, the U.K. has already switched to a mark to market approach, and IASB has a limited, short-term pension project on its agenda that could bring it close to the new U.K. accounting, which takes gains and losses out of the traditional income statement and puts them into another category known as “other comprehensive income.”