SEI Recommends FAS 87 2004 Disclosures

December 7, 2004 ( - Defined benefit plan sponsors will likely end up using a discount rate of between 5.75% and 6.25% for their 2004 disclosures required by Financial Accounting Standards No. 87 (FAS 87).

SEI Investments said in a news announcement and release of a research paper that 5.75%-6.25% was the range used in 2003 plan disclosures by half of the 1,077 plan sponsor clients in its 2004 SEI Plan Sponsor Accounting Database (with 6.25% as a 2003 median) and factoring in a 0 to 25 bps year-over-year decrease (See  FAS 87 Discount Rate Assumptions Decline  ) .

Noting that 90% of plan sponsors were in the 5.75% to 6.50% range for the 2003 disclosure, SEI lead actuary Brian Hirschfield wrote in the research paper: “The 125 basis point range of discount rates suggests diversity among companies in liability structure, investment philosophy, and willingness to be aggressive when setting rates.”

FAS 87 requires plan sponsors to disclose in their annual report pension footnote the discount rate they intend to use when valuing their plan’s accounting liabilities as well as to disclose their projected return on assets (ROA).

Drilling down on the discount rate issue, SEI said plans using a September 30 fiscal year will already have enough data from high quality bond yield changes during the previous 12 months for their latest disclosure, while those with calendar fiscal years still need another quarter’s worth of data before finalizing their rate.

SEI noted its recommendation last year that the discount rate disclosures be trimmed by 0 to 50 bps and that 68% of plan sponsors in the database took the advice.

Turning to the ROA projection, SEI said half of the 1,023 plans studied had ROAs between 8% and 8.75% while 90% were between 6.5% and 9%. The company noted that the difference between the 2002 and 2003 pension disclosures saw 18% of plans lowering their ROAs by 50 bps or more while another 25% dropped their assumption by less than 50 bps.

SEI pointed out that an ROA figure gauged between 1995 and 2004 of capital market assumptions saw a median of 8.5% for a portfolio of 60% equities and 40% fixed income and 8.75% for a portfolio of 70% equities and 30% fixed income.

“A number of major corporations have recently experienced some level of inquiry around their pension accounting practices and whether or not their assumptions are in line with FAS 87,” said Jim Morris, Senior Vice President of SEI’s Retirement Solutions. “With this backdrop, it is easy to accept that the 2004 disclosure assumptions will need to be selected with as much care as ever before.”

The SEI database used in the research consists of data from Standard & Poor’s Institutional Market Services database as well as analysis by the SEI Retirement Solutions and Advisory Team.

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