Mercer Issues Cash Balance Rule Change Cautions

April 16, 2004 ( - Proposed accounting changes for cash balance plans could make it all the more difficult to make apple-to-apple comparisons among defined benefit offerings, a consulting firm has complained.

A letter from Mercer Human Resource Consulting to the Financial Accounting Standards Board (FASB), the nation’s accounting rulemaker, pointed out that, under the proposed cash balance regulations, the liability for a variable interest rate cash balance plan would be equal to the value of the accounts at the measurement date. Signing the letter were Asghar Alam, Mercer US retirement practice leader, and Ethan Kra, Mercer chief actuary.

“For this to be the obligation of the plan,” Alam and Kra wrote, “all employees must terminate and receive their cash balance accounts as a lump sump on the measurement date.”

The problems with the FASB’s proposed rules (See  FASB Announces Cash Balance Effective Dates ) are, according to Mercer:

  • Difficulty in comparing plans . “By not reflecting future interest rate credits in the measurement of benefit obligations for cash balance plans as the current accounting standard does, the tentative decisions distort the comparability of cash balance plans with traditional defined benefit pension plans,” the Mercer officials wrote.
  • Inconsistent application . The rules deviate from the traditional approach of having a single accounting standard, by “divid(ing) individual and plan benefits into the portion subject to the immediate termination approach and the portion subject to the cash flow approach,” Mercer wrote.
  • A difficult transition . Many employers could face a major one-time earnings hit and/or a significant drop in shareholder equity.
  • Multiple transitions . It would be better to wait for any additional changes that might arise from FASB’s work with the International Accounting Standards Board (IASB) (the two agencies are cooperating on developing worldwide rules). “This would ensure that cash balance sponsors not recognize a series of accounting method changes in a relatively short period of time and that the accounting for all pension plans change in a consistent fashion,” Alam and Kra wrote.  

FASB announced that its cash balance plan guidance will be effective for fiscal years starting after December 15, 2004. A current update of the project’s status is at .