Mercer: Minimal Effect on Shareholder Equity from New Accounting Standards

August 8, 2007 ( - New benefit accounting rules requiring the inclusion of benefit deficits on company balance sheets were expected to have an adverse effect on shareholder equity, but the improvement in plan funding has made the effect minimal, according to a new report from Mercer Human Resource Consulting and Mercer Investment Consulting.

The Mercer analysis of S&P 500 plans found that strong returns and a rise in the discount rate contributed to an increase in the median funded status of pension plans from 83% in 2005 to 89% in 2006, Mercer said in a news release. Returns on plan assets improved for the fourth year in a row, with a median return in 2006 of 13.4% versus the expected 8.2%.

The improved funded status also resulted in improved cash flows, as sponsors did not need to make additional plan contributions. These things minimized the effect of FAS 158 – which requires sponsors to recognize funding deficits for pension plans and other post-retirement benefits on their balance sheet (See  Running the Fund: Out of Balance ).

While plan sponsors are rethinking aspects of their pension plan programs, it is still unclear what impact the Pension Protection Act of 2006 and mark-to-market accounting rules (See  Accounting Rulemakers Ponder ‘Mark to Market’ ApproachConsultant: DB Market Ready for Major Upheaval ) will have on plan design or asset allocations, Mercer said in the news release.

Mercer based its analysis on information in 10-K reports filed for the 2006 fiscal year by 484 plans in the S&P 500. An executive summary of the report, “How does your retirement program stack up?,” is  here .