US - Current accounting standards in the US have discouraged the use of de-risking strategies among corporate pension funds, Mercer says.
A joint report by Oliver Wyman and Mercer titled "Funny Money": The increasing irrelevance of pension earnings, says US GAAP (Generally Accepted accounting Principles) accounting standards include the use of expected return on assets (EROA) and allows companies to smooth gains or losses.
If a company switches from equity investments to lower-yielding fixed income strategies that better match their liabilities in an attempt to de-risk, the sponsor will automatically be hit with a reduction in corporate earnings because of the lower EROA, Mercer says.
"We view earnings created, or lost, through a difference between EROA and liability discounting as ‘funny money' at best. Even when a plan is fully funded and is ripe for de-risking, executives often have to deal with a painful near-term earnings reduction as they migrate their pension management strategy to an asset allocation that reduces risk and better matches their assets with their liabilities," the report says.
This so-called "funny-money" accounts for some $18bn, or 4%, of the total earnings of S&P500 companies, the consulting firm says.
However, the accounting environment could change. The Securities and Exchange Commission has signalled its intention to move US GAAP in line with International GAAP by 2015, which in three years will remove the EROA component of pension earnings for European corporations.
Meanwhile, the tools available for de-risking, generally more wide-spread in the UK, are now being developed in the US.
Mercer says: "On the buy-out side, the US life insurance industry is better capitalized now than it has been in a decade. Leading life insurers are investing heavily around areas such as product development to help corporates achieve risk transfer at an acceptable cost while minimizing counterparty credit risk. There are also investment platforms in the market that facilitate a glide-path to de-risking for pension plans via dynamic asset allocation."
There are other factors affecting companies' attitudes towards de-risking, including a "nascent but growing acceptance among investors and sell-side analysts of the long-espoused view that a pension fund is not a good place to spend shareholders' risk capital".
Pension accounting across the pond is also hurting UK pension schemes.
FTSE100 companies' median liabilities jumped about 20% last year due to changes in accounting assumptions, a separate Mercer research reveals. The consultant's annual pension accounting assumptions survey revealed liabilities increased one-fifth as market conditions and the economic outlook led to companies changing their accounting assumptions.
Mercer UK head of pension accounting Warren Singer said: "Overall, changes in accounting assumptions have increased the median FTSE100 companies' UK pension liabilities by around 20%.
"The wide range of views taken by companies on accounting assumptions, in the face of economic uncertainty, makes it very difficult for users of accounts to compare pension accounting disclosures."
The report also found FTSE100 pension schemes increased their longevity assumptions by about six months last year - equating to a 1.5% hike in liabilities.
Compared to 31 December 2008, FTSE100 companies had increased their UK longevity assumptions by about five months for current pensioners and by about seven months for future retirees.
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