Income Statement Egg by izu13039

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									                                                                   Current Retirement Plan
                                                                   Accounting Environment
                                                                  Pension Module 2—
                                                                  Pension Risk Measurement and Management

                                                                   Richard E. Jones, FSA, EA, MAAA
                                                                   Principal—Hewitt Consulting
                                                                   October 18, 2006
                           CONFIDENTIAL: To protect the
                           confidential and proprietary
                           information included in this
                           material, it may not be disclosed
                           or provided to any third parties
                           without the approval of
                           Hewitt Associates LLC.




                                          Overview of Current Retirement Plan Accounting

                                                  FASB—Pensions             FASB—Retiree Medical           IAS                          GASB 27—Pensions1

                           Income                 “Current,” yet projected, “Current,” liability measure   “Current,” yet projected, “Best estimate” liability
                           Statement              liability measure and     and “best estimate” asset      liability measure and     measure and asset
                           Earnings               “best estimate” asset     earnings                       “best estimate” asset     earnings
                                                  earnings                                                 earnings
                           Balance                Accumulated income        Accumulated income          Accumulated income              Accumulated income
                           Sheet                  statement expense less    statement expense less cash statement expense less          statement expense less
                           Liability              cash contributions        contributions               cash contributions              cash contributions
                                                  Contingent, non-linear,                                  Limit on prepaid asset
                                                  minimum based on                                         Option to recognize all
                                                  unfunded ABO                                             gains and losses on
                                                                                                           balance sheet
                           Assumption             “Current” for discount    “Current” for discount rate; “Current” for discount         “Best estimate” for
                           Selection              rate; best estimate for   best estimate for asset      rate; best estimate for        discount rate, asset
                                                  asset earnings and        earnings and demographics asset earnings and                earnings and
                                                  demographics                                           demographics                   demographics



                          1   “Pay-as-you-go” accounting is currently used for retiree medical and other postretirement benefits under GASB standards.

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 SOA 06 Annual Meeting - 134 Seminar, New Thinking on Enterprise Risk Management and Pension Plans: Part 2—Pension Risk Measurement
 and Management: A Chicken and Egg Dilemma
                                          Overview of Proposed/New Retirement Plan Accounting


                                                                   FASB—Pensions                   FASB—Retiree Medical      GASB 45—Retiree Medical

                                           Income                  No change from                  No change from current    “Best estimate” liability
                                           Statement               current                                                   measure and asset earnings
                                           Earnings
                                           Balance                 “Linear” recognition of “Linear” recognition of           Accumulated income
                                           Sheet                   liability based on      liability based on                statement expense less cash
                                           Liability               unfunded PBO rather     unfunded APBO                     contributions
                                                                   than ABO
                                           Assumption              No change from                  No change from current    “Best estimate” for discount
                                           Selection               current                                                   rate, asset earnings and
                                                                                                                             demographics




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                                          Total Retirement Plan Liabilities
                                          as a Percentage of Market Capitalization

                                          FAS 87 PBO and FAS 106 APBO as a Percentage of
                                          Market Capitalization
                                          (Based on year-end 2005 disclosures of Fortune 500 organizations)
                                                                                                                             Median for Selected Industries
                                                  All-industry median is 13.2%
                                                                                                                            Diversified Financials          4.1%
                                                                                                                            Commercial Banks                6.9%
                                                                                                                            Food & Drug Stores              9.4%
                                                                                                                            Pharmaceuticals                10.1%
                                                                                                       120%                 Energy                         18.4%
                                                                                                                            Telecommunications             35.0%
                                                                                                                            Utilities—Gas & Electric       37.6%
                                                                            9%               54%
                                                         1%       4%                                                        Aerospace & Defense            71.3%
                                                                                   23%                                      Motor Vehicles & Parts        268.0%
                                                                                                                            All Industries                 13.2%
                                                  0-10th      10-25th   25-50th   50-75th   75-90th   90-100th
                                                                          Percentile

                                              NOTE: The above percentages only include those organizations with published FAS 87/106 liabilities.



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 and Management: A Chicken and Egg Dilemma
                                          Fortune 500 FAS 87/FAS 106 Expense vs. Profits/Revenues
                                          (For Companies With FAS 87 and FAS 106 Obligations)

                          20%                                                                                            1.0%


                                                                                                                         0.8%
                          15%
                                                                                                                         0.6%

                          10%
                                                                                                                         0.4%


                                                                                                                         0.2%
                          5%

                                                                                                                         0.0%
                          0%
                                                                                                                         -0.2%


                          -5%                                                                                            -0.4%
                                 1996    1997       1998   1999       2000   2001       2002   2003   2004    2005                1996   1997   1998   1999   2000   2001   2002   2003   2004   2005

                                                                  Expense vs. Profits                                                                    Expense vs. Revenues
                                                                                                             FAS 106              FAS 87

                                Note that:
                                • Reported profits were significantly down in 2002.
                                • Medicare Part D in 2004 influences design changes and the 28% subsidy.



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                                          Estimated Impact of FASB “Phase 1” Proposals

                                          Total after-tax Fortune 500 impact is approximately 7.5%
                                          total reduction in shareholder equity (median impact is 3.5%)
                                                Includes Fortune 500 companies with FAS 87/FAS 106 obligations
                                                70% of impact is FAS 87 pension obligations
                                                As a dollar amount, 50% of estimated adjustment is for 10 companies
                                                —    General Motors Corporation                                                  — General Electric Company
                                                —    Ford Motor Company                                                          — Boeing Company
                                                —    International Business Machines Corp.                                       — Altria Group, Inc.
                                                —    Verizon Communications Inc.                                                 — Exxon Mobil Corporation
                                                —    AT&T Inc.                                                                   — Lockheed Martin Corporation

                                                Shown in order of dollar impact (largest to smallest)


                                            Source: Assumes application of Phase 1 proposals based on year-end 2005 financial status from 2005
                                                    financial statements.

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 SOA 06 Annual Meeting - 134 Seminar, New Thinking on Enterprise Risk Management and Pension Plans: Part 2—Pension Risk Measurement
 and Management: A Chicken and Egg Dilemma
                                          So What’s Weighing on Traditional Retirement Plans?


                                         Pressure to Change                                                   Some Counter Balance
                                             Discount Rates                                                        Discount Rates
                                             Asset Returns                                                         Regulatory Certainty
                                             Expense                                                               Aging Workforce
                                             Cash                                                                  Corporate Cash and Profits
                                             Volatility
                                             Globalization
                                             Employee Perceptions
                                             Hybrid Plan Concerns
                                             Income Statement Scrutiny



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                                          Trend Away From Defined Benefit Plans
                                          Number of Plans PBGC Insures (in thousands)

                                          Small Companies                                            Mid/Large Companies
                                           120                                                       5

                                           100                                                       4
                                             80
                                                                                                     3
                                             60                                                             1,000–9,999 Employees
                                                                                                     2
                                             40
                                                              <100 Employees
                                             20                                                      1
                                                            100–999 Employees                                 10,000+ Employees
                                               0                                                     0
                                               1985       1990       1995       2000                 1985   1990      1995        2000




                                            Source: PBGC’s “Pension Insurance Data Book 2004.”
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 SOA 06 Annual Meeting - 134 Seminar, New Thinking on Enterprise Risk Management and Pension Plans: Part 2—Pension Risk Measurement
 and Management: A Chicken and Egg Dilemma
                                          Plan Close/Freeze/Termination Experience of Fortune 500

                                                                        10%
                                                                                     Cumulative Since 1996
                                                                                     • Closed:          30
                                                                        8%           • Frozen:          62
                                            % of Companies With Plans



                                                                                     • Terminated:       5

                                                                        6%


                                                                        4%


                                                                        2%


                                                                        0%
                                                                              1996     1997   1998    1999    2000     2001   2002   2003   2004   2005

                                                                                                     Closed   Frozen   Terminated



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 SOA 06 Annual Meeting - 134 Seminar, New Thinking on Enterprise Risk Management and Pension Plans: Part 2—Pension Risk Measurement
 and Management: A Chicken and Egg Dilemma
                                                     Measuring Liabilities
                                                     Accountants Vs. Financial Economists



                                                     Irwin Tepper
                                                     Irwin Tepper Associates, Inc.
                                                     One Gateway Center, Suite 815
                                                     Newton, MA 02458
                                                     (617) 244-6747
                                                     www.itasoft.com
                                                                                                            1




                              Proposed FASB Rule
                                  Requires plan’s funded position to be on balance sheet
                                  instead of in a footnote.
                                  PBO is used to measure the liability
                                  Is this the correct measure?
                                  Why or why not?
                                  What is the appropriate way to incorporate PBO into
                                  accounting?




                                                                                                            2




SOA 06 Annual Meeting - 134 Seminar, New Thinking on Enterprise Risk Management and Pension Plans: Part 2—Pension Risk Measurement
and Management: A Chicken and Egg Dilemma                                                                                            1
                              GASB 45
                                  Mandates accounting for post-retirement health care
                                  benefits on an “actuarial basis”
                                  Plan sponsor must accrue a cost based on Annual
                                  Required Contribution (ARC)
                                  ARC = normal cost + amortization of unfunded liability
                                  No requirement to fund
                                  Discount rate = expected return on assets
                                  What are the implication of using this assumption?




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SOA 06 Annual Meeting - 134 Seminar, New Thinking on Enterprise Risk Management and Pension Plans: Part 2—Pension Risk Measurement
and Management: A Chicken and Egg Dilemma                                                                                            2

								
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