SEI has released research analyzing the impact that transitioning to a mark-to-market accounting method in valuing pension liabilities might have on companies’ investors, equity research, credit ratings, and management compensation programs.

The research reviewed 23 major US companies that implemented mark-to-market accounting for their defined benefit plans over the past two years, and found that such a switch had little substantive change on these key corporate constituencies.

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Thomas Harvey, director of advice for SEI’s Institutional Group, said: "While there has been much discussion in the industry regarding the pros and cons of transitioning to mark-to-market accounting for pension plans, our research suggests that the reaction by key stakeholders and the subsequent impact on corporate finances is generally negligible. Plan sponsors that might have previously been hesitant about such a change should potentially re-evaluate their pension accounting options."

Many US plan sponsors currently use a multi-year smoothing method in calculating their pension liabilities, which is designed to help decrease year-to-year volatility of pension expense, but can create a drag on future earnings.

Mark-to-market accounting removes this smoothing method and realizes gains or losses immediately as they occur, providing a more accurate view of the current results of the organization’s pension plan. Mark-to-market accounting is used on a more global basis by International Accounting Standards.

Below are a few key findings from SEI’s analysis:

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  • Returns on share price in the period surrounding the earnings announcement showed no statistically significant abnormal return values.
  • Financial analysts’ reports and quarterly earnings calls showed very few questions and no direct criticisms of the mark-to-market implementations by the companies.
  • Ratings agencies such as S&P, Moody’s, and Fitch were already using mark-to-market accounting as part of their longstanding practices.
  • Internal management received the benefit of removing drags on earnings, while ultimately gaining more favorable earnings per share without the penalty of past poor performance.
  • Non-generally accepted accounting principles (GAAP) adjustments to earnings generally removed the mark-to-market effect in investor calls, analyst reports, and management compensation program.