Farewell America

Bank Wegelin's most recent investment commentary by the same title is remarkable. It provides an extensive explanation of the US taxation risks involved when investing in US securities as a non-US person. The fact that the status of US-person is left (intentionally?) unclear is of particular concern to Qualified Intermediaries (i.e. foreign banks) because they assume liability for their clients' putative tax liability. This is the reason why Wegelin is actively advising its clients to exit all US securities and may not sign the more rigorous QI Agreement. Wegelin's move receives particular attention in Switzerland because its Managing Director is also Chairman of the Swiss Private Bankers Association.

Non-US pension funds (and listed entities) may be eligible to an exemption from a new 30% compulsory withholding tax on US securities held by non-US companies, as explained by the Green Book.

A busy week of acronyms

Today, influential Swiss daily Neue Z�rcher Zeitung NZZ has my article on XBRL. Which is perfect timing because of the forthcoming workshop that XBRL CH is organising next Monday. The subject matter of that event is the US SEC's new XBRL regulation, which is applicable for foreign filers as well - so, rather targeted. Back to back, but more generic, is the big XBRL show in Paris, beginning on Tuesday through to Thursday. Interactivity!

XBRL final rule imminent

Well, we've got something wrong there, it seems. It wasn't the US SEC meeting deliberating on the final XBRL rule that was scheduled for 10 December, it was a Sunshine Notice�to announce the SEC meeting of 17 December. But what's a week in the greater scheme of things ...

Speaking of which - it's interesting to note that one of the seven milestones on the road to IFRS adoption in the US is going to be improvement in the ability to use interactive data for IFRS reporting (p27 ff). Specifically, the SEC would look for a more detailed IFRS taxonomy in its 2011 review, presumably containing standard industry extensions. Thus, XBRL has just been hiked up to a critical priority in a strategic project.

Victims of the Crisis (II): McCain / Palin

And good riddance!

New pensions accounting to raise volatility

CFO.com reports Georgia Tech Financial Analysis Lab's research on�The Effects of Enacted and Proposed Pension Accounting Changes On Leverage, Profitability and Earnings Volatility, in which researchers simulate the impact of probably forthcoming accounting for pensions changes in the US on the DJIA components' income statement, extrapolating FAS 158 numbers to be run through the income statement. Unsurprisingly, they find a huge impact on the volatility of reported earnings, among other items and ratios. In the 2002-2006 period, volatility effectively doubles.�

As FAS 158 is likely to inform the ongoing work on the revision of IAS 19, this kind of research is valuable for European users, too because it allows us to get used to different accounting treatments resulting from fair value accounting. It is important to keep in mind that these accounting rule changes will bring reported numbers much closer to economic reality than current accounting treatment ever can. If this increasing transparency leads to more sustainable risk management policies in enterprise sponsored retirement plans, then so much the better. Users of financial statements will be able to adapt their interpretations of the numbers in any case.�

The future of public pensions

Richard Ennis' article�in the current issue of the Financial Analysts Journal may be aimed at the�ailment�of US public pensions, �but its tenets are equally applicable to European (including Swiss) public pension plans as well. A key issue is that of valuation, where current actuarial valuations are traditionally predominant under the pretext of perennial solvency of the state sponsor. Ennis convincingly demonstrates that the "issues are the value of the obligation, the cost to extinguish it, and on whom the burden of that cost falls. In a word, the concern is accountability." From a Public Choice perspective, his tenets are unlikely to be put into action just now, unfortunately. The increasing gulf between public and private pensions will have to get wider before this can be addressed fundamentally.�

Impact of funding risk

Interesting material our way comes! Watson Wyatt has had a close look at the funding status of Fortune 1000 companies 2004 - 06 with effective numbers becoming available for 2006 thanks to FAS 158. WW has developed a Pension Risk Index, which estimates the loss of the pension plan in percent of the corporate's market cap at a 5% probability of unfavourable market conditions, given the plan?s asset allocation, liability structure and sensitivity to interest rates.

An excellent article in the current issue of the Financial Analysts Journal goes an important step further: The author estimates the correlation between pension fund deficits and associated credit spreads. The results are statistically significant and show interesting characteristics: The sensitivity of spreads to unfunded pension liabilities is about five times larger for junk bonds than for investment grade bonds. Also, the sensitivity to pension liabilities is much larger than to ordinary long term debt - double for investment grade, triple for junk. The model was also run for samples from the UK and Japan, but those results only confirmed a generic sensitivity.

This is where the relevance of pensions for corporate finance becomes evident. We expect that the relevance will increase thanks to better, more relevant accounting information and increasing market attention.

CFA Pension Code of Conduct

The CFA Institute Centre is asking for comments on its Code of Conduct for Members of a Pension Scheme Governing Body until 15 August. The draft has been prepared with the assistance of the OECD and major trade associations from the Hong Kong, the Netherlands, Switzerland, the UK and the USA.

DNB on pensions

In a recent speech, the president of the Dutch central bank has presented a concise and well structured comparison between US and Dutch occupational pensions. He particularly focused on the benefits of a legal separation between sponsor and pension fund as well as on the advantages of professional asset management which is supported by the more collective approach in the Dutch system.

Corporate Finance meets pension management

"Pensions are being transformed from off-balance sheet operations with results smoothed over many years, to large consolidated business units with high potential short-term volatility, bringing them to center-stage for executive managers."

Earlier in the year, JP Morgan has come up with a white paper that is very much in line with our thinking: Corporate Finance meets Pension Management: A new era for pension leaders. The paper is obviously targeted to the US market struggling with implementing the Pension Protection Act of 2006 and US GAAP SFAS 158, but as accounting (and regulation) follows economics in Europe, too, Europeans are well advised to consider this a sneak peek preview of their own not too distant future.

JP Morgan established a set of three strategic pension metrics, namely shareholder equity at risk, corporate cash flow at risk and earnings at risk. These metrics measure the impact of pensions on the respective variable of the sponsoring corporation. Putting the metrics into action will lead to important changes in the pension plans' risk exposure: JPM expects a shift from the currently too high equity exposure into an allocation of 25%-35% in non-traditional assets. As the paper originates from JPM's asset management arm, I have a feeling that the wish may have been father to the thought ...