The implementation of Accounting Standards Codification 715 (ASC 715) in 2006 moved pension economics out of the footnotes and directly onto the financial statements of corporate America. The goal was to incorporate the net assets and liabilities of defined-benefit plans onto corporate balance sheets so that a company’s investors could gain a more transparent view of the financial impact associated with its pension plan. However, under the current Generally Accepted Accounting Principles (GAAP), plan sponsors can use a variety of techniques to smooth out that impact.
This analysis indicated that the companies in the study experienced no statistically significant changes in share price that would reflect a direct, obvious shareholder response to the implementation of mark-to-market accounting. In addition, the analysis showed no change in share price as a result of the “noise” inherent in utilizing actual asset and liability returns on financial statements rather than including those results in the footnotes. Although a few early adopters, such as Verizon, experienced abnormally large, but transitory, changes in share price following the initial announcement, those changes did not translate into sustained effects on share value, either positive or negative. This research confirms what SEI expected: With no cash implications, changes in accounting measures have no direct impact on share prices.
Ratings agencies. We also looked at whether a plan sponsor’s credit rating tends to be affected by a move to mark-to-market accounting. Reviews of the rating practices of Standard & Poor’s, Moody’s, and Fitch, as well as discussions with Moody’s Investor Services, indicate that a shift to mark-to-market by a plan sponsor does not cause a significant disruption to the financial analysis practices of the major ratings agencies. Among several other non-GAAP adjustments that the ratings agencies make to corporate financial statements, applying full mark-to-market treatment for pensions appears to be standard practice.
At the same time, pensions and pension volatility have a discrete but limited effect on overall ratings. Compared with a company’s revenue and leverage level, pension-related factors generally have a modest impact on its credit rating. Significant changes to a plan’s funded status may limit credit rating upgrades, but such changes are unlikely to lead directly to a downgrade if they’re not accompanied by other changes in the company’s creditworthiness; since the major ratings agencies already are, in effect, using MTM in their analyses, a shift to MTM accounting should have a negligible impact on a particular plan sponsor’s credit rating.