Mercer Adds Technical Suggestions for FASB Cash Balance Proposal

May 3, 2004 ( - For the second time in two weeks, Mercer Human Resource Consulting has weighed in on the fray over the controversial cash balance pension plans with a more detailed view of the changes it would like to see in current proposals.

Following an April 14 Mercer letter fromAsghar Alam, Mercer US retirement practice leader, and Ethan Kra, Mercer chief retirement actuary, that complained proposed changes could make it more difficult to conduct apple-to-apple comparisons among defined benefit offerings (See Mercer Issues Cash Balance Rule Change Cautions ) , Kra’s second letter offers six specific technical changes. Both letters were sent to theFinancial Accounting   Standards Board (FASB),   the nation’s accounting rulemaker, that is currently finalizing its cash balance rules.

In the latest 11-page letter, Kra claims that the FASB cash balance proposal “will require a complex set of detailed rules and interpretations. These would be necessary to define exactly what types of cash balance plans are covered by the interpretation and to explain what to do in a variety of fact patterns.”

As an alternative, Mercer offers an alternative view of cash balance plans that the consulting firm says, “can be relatively easily accommodated by current accounting principles and the current pension accounting model.”   Under Mercer’s alternative view:

  • Cash balance plans are defined benefit plans.
  • The substance of a defined benefit plan is the exchange of a promise of a future payment for a year of an employee’s service. The amount of the promise is defined by the plan’s formula, although it is not known with precision until the payment becomes due; the timing of the actual payment is uncertain.
  • The benefit obligation of a defined benefit plan equals the discounted present value of each future estimated payment (times its probability of occurring) attributed to service to date.

Elaborating on its second contention, Mercer says estimating the timing and amount of payments involves several measurement issues, including attribution to years of service, uncertainty of time of payment and u ncertainty as to the amount of the payment.    As for attribution to years of service, Mercer says FASB needs to provide guidance for this determination and offers up two separate models for consideration.

  • Look to the terms of the plan and conclude that the account balance is the best representation of benefits attributed to service to date.   Thus, Mercer says the current account balance – plus associated future interest credits that are not dependent on future service – is indeed the full amount of the benefit that relates to all past service. Mercer says this approach was endorsed by the Emerging Issues Task Force (EITF).
  • Determine that the default position for all plans that do not directly relate benefits to years of service is the projected benefit, allocated on a straight line basis to years of service.   Mercer admits this idea was rejected by the EITF, but says the approach is ” a practical approach easily adapted to a variety of situations.

As for alignment with current accounting principals and ease of implementation, Mercer points to the first model as the better of the two. 

Additionally, Mercer also said it six technical suggestions and alternative view of cash balance plans offer FASB several advantages:

  • they preserve comparability among all types of cash balance plans
  • they apply existing principles and standards consistently under a single model
  • they would require a “far less disruptive” transition
  • they would allow plan sponsors to handle the transition as an ordinary gain or loss as the next measurement date

“We support the [FASB] Board’s continuing efforts to provide financial statement users with meaningful, reliable, relevant, and useful information,” Kra asserted in his latest missive. “We feel that the [FASB] Board can more effectively improve the quality, consistency and comparability of reported results by issuing an interpretation that builds on existing principles and practices, maintains a unified and coherent defined benefit accounting model, and which is practical, affordable, and easily implemented by plan sponsors.”

Past FASB Actions

In March, the Norwalk, Connecticut-based FASB handed down a partial definition of what constitutes a cash balance plan in a recent project update of its broader review of Financial Accounting Standard Number 87 (FAS 87).  Per the definition, the nation’s accounting rulemakers have determined that fully vested cash balance participants are entitled to their notional account balances – those balances that are not actually realized – as either a lump sum or an actuarially equivalent annuity either immediately or at a future date, FASB said in its “Interpretation of FASB Statement No. 87” (See  FASB Sheds Some Light on FAS 87 ).

Conspicuously left out of FASB’s earlier elaboration on cash balance plans is how companies should attribute the cost of benefits earned to periods of service for plans that do not define annual retirement benefits in relation to salary and years of service.  This issue has been brought to the forefront in ongoing court battle over how IBM Corp handled its conversion from a traditional to a cash balance plan (See IBM Cash Balance Judge: Plaintiffs Due Retroactive Benefits ). FASB promises future guidance on the subject as it continues its review of FAS 87.

Going forward, FASB has plans to discuss other cash balance related issues including disclosures, transition, and an effective date at future board meetings.  In the meantime, “Interpretation of FASB Statement No. 87” is available at .  It should be noted that FASB’s Interpretation is merely a summary of Board decisions and does not change current accounting regulations.

Other Cash Balance Controversy

As 2002 drew to a close, the Treasury Department and Internal Revenue Service released new proposed regulations on the application of the pension plan age discrimination rules to cash balance plans and, in the process, have afforded plan sponsors some welcome relief on cash balance conversions (see  Balance Beam ).  However, Congressional Democrats proposed legislation to cut-off the Treasury Department’s proposal at the knees – or more accurately, its pocketbook ( See Emotion Charged Cash Balance Plan Amendment PassesUSHouse ).  The amendment to the Transportation/Treasury Appropriations bill (HR 2989) by US Representative Bernie Sanders (I-Vermont) required that government regulations affecting defined benefit plans comply with the recent Cooper v. IBM Personal Pension Plan .  In the Cooper  ruling, a federal judge ruled that IBM’s cash balance pension plan violates the provisions of Employee Retirement Income Security Act (ERISA) prohibiting age discrimination in retirement programs (See  Murphy’s Law: IBM Loses Cash Balance Ruling ). 

A current update of the project’s status is at For more information about Mercer’s letter, go to .