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October 2017 | Pension Solutions

FASB Pension Change: Nudging Sponsors Towards Additional De-Risking?

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Earlier this year, the Financial Accounting Standards Board (FASB or Board) issued a new rule regarding how plan sponsors present net periodic benefit cost in their income statements.1 In this piece, we discuss the key changes and potential investment implications.

The new guidance changes where pension expense is reflected on the income statement

Pension expense will be disaggregated on the income statement with only service cost reflected within the operating income metric, if one is maintained. This change more closely aligns reporting for pensions under US Generally Accepted Accounting Principles with the reporting requirements under International Financial Reporting Standards.

The benefit of expected return income no longer accrues to operating income

Any expected return income recognized by sponsors, generally the product of a plan’s expected return assumption and plan assets, will now be reflected outside the operating income metric if one is maintained. However, that income will still flow to the sponsor’s net income and earnings per share.

The change could impact views on pension plan asset allocation

Since expected return income will no longer be reflected in operating income, this change may affect how sponsors consider the impact of holding risk-seeking assets such as public equity which may result in a relatively high expected return on asset assumption. For example, this change could affect how some sponsors view moving towards asset allocation de-risking, and in particular more shifts to high-quality, long-duration fixed income.

Most companies will adopt the new rule in early 2018

The new guidance is effective for public entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Private entities will have additional time to adopt the new standard.

MULTIPLE FORCES OVER THE PAST DECADE HAVE ENCOURAGED PLAN ASSET DE-RISKING

FASB-Pension-Change-Exhibit1

Source: Goldman Sachs Asset Management.

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About the Author

Michael A. Moran, CFA

Michael A. Moran, CFA

Managing Director, Chief Pension Strategist, Goldman Sachs Asset Management

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