The report describes how current U.S. pension accounting standards cloud true economics by including a “funny money” component in pension earnings, presenting a fundamental obstacle to CFOs in pursuing rational risk management. According to a news release, the report estimates that this earnings component amounts to approximately $18 BN, or 4% of reported earnings at S&P 500 companies.
The authors also argue that reported pension earnings are becoming increasingly irrelevant, as the underlying economics become more transparent. Proposed amendments to international accounting standards would remove the component of pension earnings by 2013, and the Securities and Exchange Commission has indicated that convergence in U.S. and International GAAP standards may occur sometime around 2015.
“We see a growing number of U.S. corporates announcing an intention to reduce the impact of defined benefit pension volatility on their balance sheets. We believe evolving accounting standards will hasten the need for others to adopt similar approaches to better manage market perception of their plans, similar to a trend we have seen in Europe,” said Mick Moloney, Senior Partner and Head of Mercer’s Financial Strategy Group, in the news release.
The new report also notes that options available to corporates in devising a pension risk reduction strategy have expanded – ranging from dynamic asset allocation to insurer buyout. “Due in part to current favorable conditions in the life insurance market and the strategic options available to them, we believe that companies willing to quickly undertake a thorough diagnostic followed by the enactment of a plan for pension risk reduction may be able to create substantial shareholder value in the long-term,” said Ramy Tadros, Partner and Head of Oliver Wyman’s North America Insurance Practice, in the announcement.To obtain a copy of the joint Oliver Wyman and Mercer report, “Funny Money: The increasing irrelevance of pension earnings”, go to http://www.oliverwyman.com/ow/funny-money-pension-earnings.htm or http://www.mercer.com/funny-money-pension-earnings.