SEI Research: A Switch to Mark-to-Market Accounting Has Little Impact on Key Financial Metrics

Download as PDF

Analysis Finds a Change in Pension Accounting Has No Negative Effects on Companies

OAKS, PA -- (Marketwired) -- 11/19/13 -- SEI (NASDAQ: SEIC) today 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 U.S. 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.

"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," said Thomas Harvey, Director of Advice for SEI's Institutional Group. "Plan sponsors that might have previously been hesitant about such a change should potentially re-evaluate their pension accounting options."

Many U.S. 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:

  • 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.

For the full research paper, please visit: www.seic.com/MarkToMarket2013.

About SEI's Institutional Group
SEI's Institutional Group is one of the first and largest global providers of outsourced fiduciary management investment services. The company began offering these services in 1992 and today acts as a fiduciary manager to more than 450 retirement, nonprofit and healthcare clients in seven different countries. Through a flexible model designed to help our clients achieve financial goals, we provide asset allocation advice and modeling, investment management, risk monitoring and stress testing, active liability-focused investing and integrated goals-based reporting. For more information visit: http://www.seic.com/institutions.

About SEI
SEI (NASDAQ: SEIC) is a leading global provider of investment processing, fund processing, and investment management business outsourcing solutions that help corporations, financial institutions, financial advisors, and ultra-high-net-worth families create and manage wealth. As of September 30, 2013, through its subsidiaries and partnerships in which the company has a significant interest, SEI manages or administers $529 billion in mutual fund and pooled or separately managed assets, including $219 billion in assets under management and $310 billion in client assets under administration. For more information, visit www.seic.com.

Company Contact:
Laura Edling
SEI
+1 610-676-3827
ledling@seic.com

Source: SEI

Released November 19, 2013