“De‐risking” Corporate Pension Plans: Options for CFOs

Abstract

Until the stock market bubble burst in 2000-2002, most CFOs viewed their defined benefit pension plans as profit centers and relatively risk-free sources of income. Since neither pension assets nor liabilities were reported on corporate balance sheets, and expected returns on pension stocks could be substituted for actual returns when reporting net income, the risks associated with DB plans were masked by GAAP accounting and thus assumed to have no bearing on corporate capital structure. But when stock prices and corporate profits fell together, the risks associated with conventional stock-heavy pension plans showed up first in reduced pension surpluses (or, in many cases, deficits) and then later in higher required cash contributions and lower reported earnings. As a consequence, today's investors (and rating agencies) are viewing pension and other legacy liabilities as corporate debt, and demands for transparency and increased funding have triggered accounting changes and proposed legislative reforms that will further unmask the economics. 2006 Morgan Stanley.

The tale of two pension reforms: A US–Japan comparison

“…Introducing a pension liability on the balance sheet and disclosing the full extent of pension assets and liabilities in the footnotes made transparent for the fi rst time the status and questionable ability of corporate pensions to assume a stronger role in the three-legged stool 12 of retirement savings. 13 Japanese companies stumbled onto this situation after many years of experience managing stable plans and comfortably surpassing the promised rate of return. The introduction of pension accounting standards was a shock to the system because, as explained in the next section, it heightened awareness and urgency to restructure something companies could not fi x so easily.…”