Buy-side Analysts Split on Pension Finance 'Crisis' Views

October 31, 2003 ( - While buy-side analysts at money management firms may be divergent on their views of pension financing issues, one thing rings loud and clear for them - the issues warrant close monitoring.

In fact, seven of the nine firms recently polled by Mercer Human Resource Consulting and Mercer Investment Consulting now explicitly incorporatepension-related financial information in their valuations, compared with most firms not focusing any attention to the issue as recently as two yearsago. As evidenced by the response, all of thefirms agree that the issue has gained a significantly higher profileintheir research process.

“Institutional investors are following the pension funding issueclosely,focusing their greatest attention on the discount rate used to valueliabilities and the expected return on assets,” says Barry McInerney,USleader of Mercer Investment Consulting. “Public companies should beprepared to defend assumptions that are not in-line with generalcapitalmarket assumptions or with its industry’s norms.”

The examinations, though, are still not uniform as the nine firms – representing an aggregate asset under management total of $1.6 trillion – are still split on what to scrutinize. Five adjust company value for apension surplus or deficit while four do not. Of the firms that do m akeadjustments, three do their own forecasts of pension surplus andfundingrequirements, two saying such adjustments are done “in considerable detail.”Many of the firms check discount rates and expected return on assetassumptions, and penalize those companies with assumptions they c onsiderout of line. This happens most often with “overstated” rate-of-returnassumptions, Mercer found.

Taking it one step further, Mercer uncovered three of the nine discount reported pension income inearnings forecasts, while five did not. Of the five that did not,severalcited their focus on cash flow and operating earnings, rather than onnetincome, as the reason. 

Companies that make pension financial information easily accessiblewillwin points from buy-side analysts and investors,” says Asghar Alam, USretirement practice leader at Mercer Human Resource Consulting.“Providingonly the minimum required disclosure may cost a firm credibility withanalysts.”

But today’s standards may be just the proverbial tip of the iceberg as Mercer says e ven deeper scrutiny could be on the horizon.   As evidence of this point, the consulting house points to academic research recommending analysts assess the appropriateness of pensionplan asset allocation strategies when valuing a firm and itsprospectiveearnings.

Further, when Mercer probed about the implications of the United States adopting a“mark-to-market”approach as has been done in the UK with FRS17, the consultants found six of the firms surveyed said they would welcome the increasedtransparency, and that they believe it would have a positive impact onlong-term development. However, on the other side some felt there could be negativeshort-term implications depending on how it is implemented. Two firms saidit would be negative from a capital markets perspective. 

The identities of the nine investment management companies were kept in confidence.   More information about Mercer’s consulting practice can be found at