This FSP applies to employers that are subject to the pension plan disclosure requirements of Statement 132R. The objective of the FSP is to provide users of financial statements with an understanding of: 1) how investment allocation decisions are made; 2) the major categories of plan assets; 3) the inputs and valuation techniques to measure the fair value of plan assets; 4) a rollforward of Level 3 inputs; and 5) significant concentrations of risk within plan assets.
These disclosures are to be presented on an annual basis beginning with fiscal years ending after December 15, 2009. For calendar year entities, this will be the 2009 10K. Prior year comparisons are not required to be presented in the first and second year after adoption.
1. Investment Allocation
Under the FSP the employer is required to disclose information about how investment allocation decisions are made, including factors that are pertinent to an understanding of investment policies and strategies. This will require a narrative description of target allocation percentages, investment goals, risk management practices, permitted and prohibited investments, diversification and the relationship between plan assets and benefit obligations.
2. Determination of overall expected long-term-rate of return
A narrative description of the basis used to determine the overall expected long-term rate-of-return-on-assets assumptions is to be disclosed with consideration given to each of the major categories of assets.
3. Fair Value of Plan Assets
A separate disclosure using the guidelines and tabular formats from FASC 820 (fka FAS 157) will be required for the pension plan’s assets and the other postretirement benefit (OPEB) plan’s assets. The disclosures should include the fair value of each major category of plan assets and the Level of the hierarchy that its significant inputs fall under. Examples of major categories include cash and cash equivalents, equity securities, debt securities, corporate debt securities, asset-backed securities, structured debt, derivatives, investment funds and real estate. Also, a discussion of the valuation techniques and inputs used to measure fair value is to be presented in a narrative format.
The level 3 valuations require a reconciliation of the beginning and ending balances of the fair value. This reconciliation is to include the actual return on plan assets (as defined in FAS 87 and 106) identifying the amount related to assets still held and the amounts related to assets sold during the period; any purchases, sales and/or settlements during the period; and any transfer in and/or out of level 3.
4. Significant Concentrations of Risk
An employer is required to discuss any significant concentrations of risk in the plan assets such as a significant investment in a single entity, industry, country, commodity or investment fund.
The following is an example of what the new additional disclosures might look like.
Plan assets are invested using a total return investment approach whereby a mix of equity securities, debt securities and other investments are used to preserve asset values, diversify risk and achieve our target investment return benchmark. Investment strategies and asset allocations are based on careful consideration of plan liabilities, the plan's funded status and our financial condition. Investment performance and asset allocation are measured and monitored on an ongoing basis.
Plan assets are managed in a balanced portfolio comprised of two major components: an equity portion and a fixed income portion. The expected role of Plan equity investments is to maximize the long-term real growth of Fund assets, while the role of fixed income investments is to generate current income, provide for more stable periodic returns and provide some protection against a prolonged decline in the market value of Fund equity investments.
The current target allocations for plan assets are 30-80% for equity securities, 30-65% for fixed income securities, 0-10% for cash and 0-15% for alternative investments. Equity securities include U.S. and international equity, while fixed income securities include long-duration and high-yield bond funds and emerging market debt funds. Other types of investments include investments in hedge funds and private equity funds that follow several different strategies.
The fair values of our pension plan assets at December 31, 2009 by asset category are as follows:
Asset CategoryMarket Value at 12/31/09Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)Equity Securities (a)$82.1M$0.0$82.1M$0.0Debt Securities (b)$91.5M$0.0$91.5M$0.0Cash and Cash Equivalents (c)$0.4M$0.4M$0.0$0.0Other Investments (d)$35.7M$0.0$32.6M$3.1MTotal Pension Assets$209.7M$0.4M$206.2M$3.1M
(a) This category includes investments in equity securities of large, small and medium sized companies and equity securities of foreign companies including those in developing countries. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund.
(b) This category includes investments in investment-grade fixed-income instruments, US dollar-denominated debt securities of emerging market issuers and high yield fixed-income securities that are rated below investment grade. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund.
(c) This category comprises cash held to pay beneficiaries. The fair value of cash equals its book value.
(d) This category represents a private equity fund that specializes in management buyouts and a hedge fund of funds made up of 30+ different hedge fund managers diversified over eight different hedge strategies. The fair value of the private equity fund is determined by the General Partner based on the performance of the individual companies. The fair value of the hedge fund is determined by the fund’s administrator using valuations provided by the third party administrator for each of the underlying funds.
The change in the fair value for the pension assets valued using significant unobservable inputs (Level 3) was due to the following:
Limited Partnership InterestBeginning balance at 12/31/08 Actual Return on Plan Assets: Relating to assets still held at the reporting date Relating to assets sold during the period Purchases, sales and settlements Transfers in and/or out of Level 3 Ending balance at 12/31/09
The fair values of our other postretirement benefit plan assets at December 31, 2009 by asset category are as follows:
Asset CategoryMarket Value at 12/31/09Quoted Prices in Active Markets for Indentical Assets (Level 1)Significant Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)Core Bond Fund (e)$5.4M$0.0$5.4M$0.0
(e) This category includes investments in US government obligations and mortgage-backed and asset-backed securities. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the fund.
Get started early and don't forget to include the guidance from ASU 2009-12 "Investments in Certain Entities that Calculate Net Asset Value per Share."