In a November 12, 2008 letter to Congress, the American Institute of Certified Public Accountants ("AICPA") and 300 plan sponsors and pension associations urge new legislation that would help employers avoid "huge, countercyclical contributions," for credit crisis induced losses. The authors' stated rationale is that monies diverted to support defined benefit plans could instead be used for "current job retention, job creation and needed business investments." The letter suggests that, worse yet, employers may be forced to freeze plans altogether unless the Pension Protection Act of 2006 is modified to allow "full smoothing of unexpected losses." Click to read the letter.
One of the letter writers, Watson Wyatt, criticizes the averaging method which, unlike smoothing, does not include projected returns as part of the determination of market values. According to this consultancy's website, "averaged assets cannot exceed (or trail) current market value by more than 10 percent. Prior rules allowed for 20 percent. When asset values drop sharply as they have in recent months, this tight limit around market value creates considerable funding challenges for pension plan sponsors." Finally, the Pension Protection Act of 2006 accelerates replenishment of "underfunded" plans, putting pressure on employers to pony up cash at the same time that they are unlikely to be flush.
While this blogger fully empathizes with the economic pain that can occur when "artificial" reports force real change (i.e. rating downgrade, higher cost of capital, cash squeeze, share price hits, etc), I think Joe and Sally Retiree are still left in the dark as to the financial soundness of their retirement plan. This knowledge gap about which numbers are the right numbers is something we've addressed here before. (See "Will the Real Pension Deficit Please Stand Up?" June 22, 2006.) Global accounting imperatives, national laws and regulatory urgencies add to the confusion about pension metrics - which ones deserve attention and which ones are outright "bad" representations of a plan's ability to send checks every month, made more so when they result in expensive consequences.
This entire debate reminds me of a great line in the 2008 HBO movie entitled "Recount." In this small screen version of uncertainty related to the 2000 U.S. presidential election (remember hanging chads?), the Kevin Spacey character turns to his colleague at one point and says, with great frustration, how he wishes he just knew who won.
In the same vein, one asks - "What is the truth?" Understandably, plan sponsors are upset at having to outlay cash contributions "forced" by the Pension Protection Act of 2006, FAS 158 and/or other "cannot ignore" dictates but should they not counter with a robust solution that gets to economic reality? Should retirees be worried that all or some published numbers lead astray or assume instead that pension decision-makers have it under control?
According to best-selling business author and leadership guru, Warren Bennis, "We have more information now than we can use, and less knowledge and understanding than we need. Indeed, we seem to collect information because we have the ability to do so, but we are so busy collecting it that we haven't devised a means of using it. The true measure of any society is not what it knows but what it does with what it knows."
I raise my hand for reporting rules that (a) reflect the sponsor's true ability to pay, now and later on (b) avoid confusion (i.e. too many regulations can result in conflicting data points or real questions about how to comply with statutory reporting standards) (c) explain the process by which the plan manages its alphabet soup of pension risks and (d) help shareholders, taxpayers, plan participants and other interested parties assess whether a defined benefit plan is "excessively risky."
Is this too much to ask?
