Pension Risk: Mark-to-Market Accounting Methods Retirement Webinar Series March 22, 2012

Transcription

1 Pension Risk: Mark-to-Market Accounting Methods 2012 Retirement Webinar Series March 22, 2012

2 Pension Risk: Mark-to-Market Accounting Methods Today s Speakers Agenda Joe McDonald Aon Hewitt Mark-to-Market Accounting Overview John Tus Honeywell James Lacy AT&T Honeywell Story AT&T Story Q&A 2

3 Mark-to-Market Accounting Overview

4 Integrated Risk Management Risk Management Investment Policy Funding Strategy Plan Design Assumptions and Methods Plan sponsors adopting multi-faceted approach to plan management 4

5 Pension Accounting Basics Service Cost Recognized Balance in P&LSheet Income Statement Pension Net Interest Recognized Cost Income/Expense Expected in P&L Remeasurements Smoothing Recognized in OCI Current Pension Accounting Rules Viewed by Many as Broken 5

6 Pension Accounting Method Changes: Recent Announcements Honeywell AT&T Verizon FirstEnergy UPS Announcement Date 11/16/2010 1/13/2011 1/21/2011 1/26/2012 1/27/2012 Core Pension Expense SC + PSC + IC EROA SC + PSC + IC EROA SC + PSC +IC EROA SC + PSC +IC EROA SC + PSC +IC EROA Annual MTM Gains/Losses Gains/Losses Gains/Losses Gains/Losses Gains/Losses Continue Asset Smoothing NO NO NO NO NO Continue to apply Corridor YES NO NO NO YES Reduce EROA Assumption? YES 9.0% to 8.0% YES 8.50% to 8.25% YES 8.5% to 8.0% YES 8.25% to 7.75% NO Include OPEB? Pension only Pension and OPEB Pension and OPEB Pension and OPEB Pension and OPEB Dimensions to Mark-to-Market Create Decision Points for Plan Sponsors Other companies adopting such changes include: PolyOne, Rexnord, GrafTech, Ashland, Reynolds American, Windstream Corporation 6

7 Effects of Announcement on Stock Price 2% Company S&P day % in Stock Price 1% 0% -1% -2% VZ T HON FE UPS Each Announcement Met with Varying Degrees of Market Outperformance ¹Pension announcement was combined with a number of other changes 7

8 Potential Rationale for Accounting Change Transparency Focus on Core Business Operations Eliminate drag on future earnings Low Point in Interest Rate Cycle Facilitate other Actions Comparability Aligned with Future Global Accounting Trends Favorable Due to Confluence of Variety of Factors Proprietary & Confidential 8

9 The Honeywell Story John Tus

10 Honeywell Overview ACS 42% Aerospace 32% 2011 Financial Summary ($B) Sales Segment Profit Automation & $15.5 $2.1 Control Solutions (ACS) Aerospace $11.5 $2.0 Performance Materials & Technologies (PMT) $ 5.7 $1.0 PMT 16% Transportation Systems 10% Transportation Systems $ 3.8 $0.5 Four Global Business Segments Over 132,000 Employees Doing Business in Over 100 Countries Fortune 100 Company - $36.5 Billion in Sales in *Pie chart and sales totals based on 2011 sales A Large, Global Multinational Company

11 Honeywell Pension Plans Sponsor Both US (77% PBO) and Non-US (23% PBO) Plans At December 31, 2011 ($B) PBO ($20.2) Fair Value of Plan Assets 16.8) Funded Status ($3.4) Actuarial Assumptions Used to Determine Benefit Obligations at December 31, Discount Rate 4.89% - Expected Annual Rate of Compensation Increase 4.5% Expected Rate of Return on Plan Assets 8% 11

12 Accounting Change Considerations MTM Accounting Preferable - Concurrence of Independent Auditors Aligns to International Accounting Trends - Both IFRS Today and IASB Proposal Utilize MTM (Adjustment Through OCI) Adds Transparency to Operating Performance - Recognize any Pension Gains/Losses Annually in 4Q (MTM) Interest Rates at Historic Lows Unique Opportunity - Mitigates Pension Expense Downside Volatility Rates Stable, Likely to Rise Change Retrospectively Applied to Prior Periods Financials Recast - Recognize ~$5.5B of Deferred Losses in 2010 and Prior Periods Shift To MTM Accounting In

13 The AT&T Story James Lacy

14 AT&T in Profile AT&T Benefit Obligation and Plan Assets ($ in billions) $90.6 Projected benefit obligation Plan assets $60.4 $91.1 $55.8 World s largest telecom company by revenue Ranked 12th among all US companies in the Fortune 500 >250,000 employees Pension Benefits and Postretirement Benefits Open noncontributory pension and death benefit plans Variety of medical, dental and life insurance benefits >375,000 non-active pension plan participants Funding Status 82% funded on our pension 28% funded on our retiree medical AT&T Intellectual Property. All rights reserved. AT&T and the AT&T logo are trademarks of AT&T Intellectual Property.

15 Benefit Plan Accounting Change Implemented new benefit accounting policy that recognizes market-based gains and losses in the year incurred, instead of amortizing them over time Service costs, interest costs and expected return on assets to be booked quarterly Annual adjustment booked to reflect actual return on assets, changes in discount rates and other actuarial assumptions Discontinuing use of a smoothing corridor Adjusting prior years financials to be consistent with new policy Changing where some benefit costs book (operating segments vs. other segment/consolidation) AT&T Intellectual Property. All rights reserved. AT&T and the AT&T logo are trademarks of AT&T Intellectual Property.

16 Advantages Simplifies benefit plan accounting and adds transparency Aligns with fair value accounting concepts Recognizes plan gains or losses in year they occur; eliminates amortization of gains/losses Non-cash event. No changes in: Funding status of benefit plans Cash flow Dividend policy AT&T Intellectual Property. All rights reserved. AT&T and the AT&T logo are trademarks of AT&T Intellectual Property.

17 Summary

18 2012 Retirement Webinar Series Date March 8 March 22 Topic Lump Sum Cash Outs Mark-to-Market Accounting April 19 Total Rewards Optimization and Delivery May 3 Diversity: Disparity in Savings and Driving Solutions May 24 Retirement Income Adequacy To learn more about upcoming webinars in this series, please search 2012 Retirement Webinar Series on AonHewitt.com 18

19 Your Questions 19

20 Thank you. For additional information, please contact: Joe McDonald, FSA Aon Hewitt