Ferko estimates that Genlyte’s aggregate defined benefit plan assets totaled $105 million last year, while its obligations were $120 million. In Canada, the assets and obligations reached $13 million and $18 million, respectively. “Obviously, we’re slightly underfunded, but for a company with $1.6 billion in sales this is not a big issue,” he says. “Nevertheless, we’re outsourcing almost everything. We’ve weighed the cost of this approach versus building an internal staff, and it makes sense for us.”
Time to Reevaluate?
The combined weight of FAS 158 and the PPA has accelerated the push to freeze or terminate pension plans. McKinsey & Co. projects that by 2012, 50 to 80 percent of all private-sector defined benefit assets will be frozen or terminated, as compared with 25 percent today. A recent survey by the Employee Benefit Research Institute pegs the current percentage of frozen or terminated plans at one-third, with another third expected to follow suit within the next two years.
The trend seems clear, and regardless of which approach a company takes, most will need to reevaluate their approach to pension management. “Companies are freezing their defined benefit plans because they can’t tolerate the volatility, but as soon as they do that, [the plan] is no longer a strategic resource in the company,” explains Aaron Meder, head of Asset Liability Investment Solutions in the Americas at UBS Global Asset Management.
A key part of deciding to outsource, BGI’s Bozeman maintains, is weighing a potential service provider’s expertise. “With defined benefit plans now a liability on the balance sheet each year, you’ve suddenly got to deal with an entity that’s as big as a large operating division in some companies, and yet you have little or no expertise in managing it,” he says. Jim Morris, senior vice president, Retirement Solutions, at SEI Investments in Oaks, Pennsylvania, has a similar take. “While some large organizations have dedicated teams to do this, that’s an anomaly,” he says. “In most organizations, pension investment management is a part-time job. Due to the impact of market volatility on cash requirements, financial reports, and debt covenants, a single person cannot do the job, much less an internal staff.”
Despite the changed landscape, not everyone is sanguine about handing over management of pension assets and liabilities. Amtrak, for example, examined the strategy two years ago and found it wanting. “It wasn’t like the fiduciary responsibility was coming completely off our shoulders,” says Amtrak treasurer Dale Stein. “To meet those responsibilities, we’d still need to approve the asset allocation, investment managers, and fee schedules, and oversee the performance. We didn’t see the cost-benefit.”
But Accenture’s Halverson argues that any discussion of the benefits of outsourcing should focus on whether and to what degree employees benefit. “Many Americans may find that their savings or retirement plans are not sufficiently funded to sustain their retirements,” he explains.
And, while integrated pension management isn’t free and isn’t likely to be offset cost-wise by labor reduction, having another firm — especially a financial institution — as a co-fiduciary gives employees the peace of mind “of another deep pocket,” says Reed Smith’s Martini.
At the very least, companies now have a wider range of choices as they confront the demands of the PPA and FAS 158. Some may welcome a little navigational assistance as they travel that road to retirement.
Russ Banham is a contributing editor of CFO.
Tough Rules, Tough Times
The Pension Protection Act of 2006 and Financial Accounting Standard 158 represent two critical examples of the push for more transparency and disclosure that began with the Sarbanes-Oxley Act of 2002. The PPA requires companies to make the contributions necessary to plans to amortize their unfunded benefit liabilities within the next seven years, in addition to tightening smoothing methods and shortening amortization periods. The law essentially forces sponsors of underfunded plans to contribute substantially more to their plans on an annual basis — the case, for example, with Amtrak. “Based on the new rules, our actuaries told us we needed to increase our payment into the defined benefit plan by 75 percent this fiscal year, and must make additional payment increases over the next few years,” says William Campbell, CFO of the Washington, D.C.-based railroad.
FAS 158 (Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans), issued in September 2006, further ups the ante. The rule requires companies to recognize the funded status of their benefit plans, measured as the difference between plan assets at fair value and the benefit obligation, in their annual statements of financial position. “The requirements to account for funding shortfalls caused huge volatility in many companies’ income statements,” says Jamie Cornell, senior vice president of employer marketing at Fidelity Employer Services Co. “For publicly traded companies, there was the possibility of falling share prices.” — R.B.