Smoothing May Distort Financial Picture for DBs

Understanding the financial status of a defined benefit (DB) plan requires understanding how smoothing methods have affected the plan’s reported data, a report finds.

“This report demonstrates that, while smoothing mechanisms play an important role in the management of funding requirements, smoothed results may not provide an appropriate basis for understanding a plan’s current financial status,” said Joseph Silvestri, retirement research actuary with the Society of Actuaries (SOA) and lead researcher of the report.  

“Observations on Input and Output Smoothing Methods: How do they affect the funding of defined benefit plans?” investigates the differences between two types of smoothing methods (input and output) from an actuarial perspective. In doing so, it demonstrates how input smoothing affects reporting of two critical variables in the determination of plan financial status—plan assets and plan liabilities.   

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By examining three alternative statutory schemes—current law, current law modified to increase input smoothing and current law modified to increase output smoothing—the research aims to inform the public and policymakers of how the two families of methods can affect three key principles of funding regulation: the solvency of the plans, the predictability of statutory requirements and the transparency of financial information about the plans.

 

(Cont’d…)

Observations surrounding the three principles include:  

The choice between input and output smoothing methodologies does not directly affect the solvency of defined benefit plans or the predictability of statutory requirements. 

Input smoothing methodologies change the relationship between market-based and reported values of pension assets and liabilities. Users of the reported values need to understand their relationship to market-based values to ensure appropriate use of the information. 

Smoothing methods spread the recognition of volatile plan experience over time so that, in the case of funding requirements, sponsors can better manage the effect that plan experience has on their operations. However, smoothing methods do not reduce the underlying risks associated with defined benefit plans.  

“Smoothing may defer increased contribution requirements caused by poor plan experience, but it does not prevent them,” Silvestri said. “Sponsors wishing to manage the risks associated with their plans have several options available to them, including modification of asset allocations and settlement of plan obligations.”   

By illustrating the three statutory schemes, the SOA suggests that, when using reported data about a defined benefit plan, users should understand how smoothing has affected the data and assess whether it provides the best information for their purpose.  

The report can be downloaded from here.

FINRA Taps Citigroup Exec as CIO

Steven J. Randich was named executive vice president and chief information officer (CIO) by the Financial Industry Regulatory Authority (FINRA).
 

Randich, currently Citigroup’s co-chief CIO, will oversee technology at FINRA, as well as the organization’s registration and disclosure division. He brings to FINRA an extensive background of market, technology and operations experience. He has been with Citigroup for seven years, most recently as co-chief information officer of Citigroup and global head of technology and CIO for Citi’s institutional clients group.

Before joining Citigroup, Randich was executive vice president of operations and technology, and chief information officer of NASDAQ. He had previously served as executive vice president and chief information officer for the Chicago Stock Exchange.

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He begins at FINRA on March 11 and will report directly to Richard Ketchum, FINRA’s chairman and chief executive.

“Throughout his career, Steve has combined superb leadership and technological skills with strong market and industry knowledge to earn a terrific reputation for working with business clients to identify and respond to priority technology issues,” Ketchum said. “These strengths make Steve ideally qualified to lead our technology team on our many important initiatives—including the continued rollout of the new exam technology platform, enhancements to CRD/BrokerCheck and development of FINRA’s response to the consolidated audit trail (CAT) request for proposal.”

Randich holds a bachelor’s degree in computer science from Northern Illinois University and a master’s degree in business administration from the University of Chicago.

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