FASB Unveils Proposal to Require More Pension Disclosure
In what should be seen as a giant step forward for anyone interested in pension fund financial health, the Financial Accounting Standards Board (FASB) just approved a proposal that could force additional disclosures about investments. The rationale should be obvious. Defined benefit plans are allocating billions of dollars to alternative investments. When these capital pools invest in "hard to value" assets, trying to gauge pension risk is like catching jello. It's a near impossible task.
According to the Board Meeting Handout for February 13, 2008, few plan sponsors have gone beyond what is required of them by FAS 132(R), essentially reporting asset class categories "without further disaggregation." Additionally, the Board decided in November 2007 that FASB Statement No. 157 (fair value rule) would not apply to pension plans. In the absence of other mandates and voluntary disclosure (something free market economists favor, myself included), retirees and shareholders are nearly clueless when trying to gauge potential fallout from "risky" investing. If approved as an amendment of Statement 132(R), the new rule would "include a principle for disaggration of plan assets and a list of required asset categories" and "require further disclosure of categories or subcategories for concentratons of risk."
This blog's author has written ad nauseum about the critical information void with respect to pension investment risk. In fact, I literally just submitted a provocative piece on this topic for CFA Magazine. It will be part of the March/April 2008 issue.
Here are some initial thoughts. (I could write a book on this topic of pension risk disclosure.)
- Could disaggregation veil true risk exposure in much the same way that single asset performance is not the same as portfolio performance?
- Will there be a universal consensus about how to properly measure risk?
- Will certain risk metrics be accepted as superior for a particular asset class (an approach I advocate)?
- Will increased disclosures discourage some plan sponsors from dipping their toes into alternative investment waters?
- Will pensions be encouraged to hire Chief Risk Officers as pension risk management takes its rightful place on stage?
- Will some instruments such as derivatives be decomposed as standalone versus embedded?
- Will alternative managers push back from pension clients when asked to open their trading books to more scrutiny? (Remember the response when several endowments asked alternative fund managers for more information as part of the Freedom of Information Act a few years back? They were shut out of deals.)
The U.S. Government Accountability Office is soon to release its study about pension fund investments in hedge funds. It will be interesting to compare their recommendations with those from the folks in Norwalk, home of FASB.
