I have seen two actuarial and consulting firms recently comment on a proxy reporting issue you may face soon if you maintain a defined benefit plan that covers some or all named executive officers (NEOs), “Proxy Hysteria Coming For Companies With DB Plans.” As readers know, public companies must report the increase in the actuarial present value of NEOs’ pension benefits in the Summary Compensation Table under “Change in pension value and nonqualified deferred compensation earnings ($)” and the Pension Benefits Table.
The actuarial present value is a discounted value of the anticipated payment stream just as it was a year earlier. While there are many assumptions that actuaries select in determining an actuarial liability, two, in particular, have changed for many companies from 12/31/2013 to 12/31/2014. One is the discount rate which will have decreased by somewhere in the neighborhood of 100 basis points, and the other is the mortality assumption. Late last year, the Society of Actuaries released its newest mortality study, and many companies elected to adopt the new tables.
The effect of the change in discount rate will vary, largely on the age of the NEO in question, but it's not unreasonable to think that for most NEOs that just that discount rate change will have increased the actuarial liability attributed to them by 8-12%. Yes, Americans are living longer. Mortality assumptions should be updated from time to time. But, for proxy purposes, the year of the update causes an additional spike in the liability attributed to the individual NEO, perhaps an additional 5% depending upon age and gender.
See also, Towers Watson’s “Reported Executive Pension Values Will Spike in 2015 Proxies Due to Change in Assumptions.”
This artificial increase will be even more pronounced for companies that also provide a SERP (non-qualified plan) for their NEOs. If the company has frozen its defined benefit pension plan, the increase will not appear as large. However, proxy readers may wonder why there is an increase at all given that the plan is frozen.
So what should affected companies do? First, read the linked blogs to better understand the problem. Then consult your actuary and begin working on an explanation for the proxy.