Pension Reporting: The Differences between a 10-K and Form 5500
By Mark Johnson, Ph.D., J.D.
Institutional investors, retirees, corporate stockholders, and regulators all have a need to closely monitor pension fund performance. There are two leading sources of publicly disclosed information for public company pensions, the Form 10-K and the Form 5500. This article reviews both data sources and compares the information found in each.
Pension Reporting on an SEC Form 10-K
The Form 10-K is an annual report that public companies must file with the U.S. Securities and Exchange Commission (“SEC”) within 75 to 90 days after the end of the firm’s fiscal year, depending on the size of the company and the length of time they have been public.
The 10-K provides a comprehensive overview of the company's business and financial condition and, most importantly, includes financial statements that have been audited by an independent accounting firm. The 10-K is not to be confused with the glossy “Annual Report to Shareholders” booklet that a company must send to its shareholders when it holds an annual meeting to elect directors.
The SEC requires that each Form 10-K must include specified disclosure sections. The items of particular interest to institutional investors, retirees, and other pension watchers will be the following:
Item 6. Selected Financial Data.
Investors will typically find a detailed Five-Year Financial Summary contained in table format in Item 6. This section gives an overview of the firm’s financial performance, but may or may not include much detail on pension obligations.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In this section the management team may discuss pension expenses, net pension liabilities, accounting for pensions, postretirement benefit obligations (including retiree medical plans), cash contributions to the pension plan, and unfunded pension obligations.
The footnotes to the financial statements contained in the Form 10-K can be a source of valuable data on pension obligations. For example, the footnotes are likely to disclose the firm’s “Significant Accounting Policies and Estimates” including the following in regard to pension and welfare plans:
• Average return on assets
• Expected rates of return on pension plan assets
• Health care cost trend rates
• Minimum pension funding requirements, by dollar value, by year for the next five years
• Projected and accumulated benefit obligations
Projected pension liabilities, as reported in the 10-K, typically include projections over time. The liability number reported in the 10-K is generally a much larger amount than information contained in the Form 5500.
Pension Reporting on a Department of Labor Form 5500
The Form 5500 is an annual report that must be filed by employee benefit plans with the Department of Labor (“DOL”). The form was developed jointly by the DOL, the Internal Revenue Service (“IRS”) and the Pension Benefit Guaranty Corporation (“PBGC”) to achieve reporting disclosure and compliance under Title I and Title IV of the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code. A Form 5500-SF is a comparable annual return modified for use by small employee benefit plans.
A single completed Form 5500 can total dozens of pages of data once all the required attachments are considered. Various schedules are used with the Form 5500, including:
• Schedule A - Insurance Information
• Schedule C - Service Provider Information
• Schedule D - DFE/Participating Plan Information
• Schedule G - Financial Transaction Schedules
• Schedule H - Financial Information
• Schedule I - Financial Information - Small Plan
• Schedule MB - Multiemployer Defined Benefit Plan and Certain Money Purchase Plan Actuarial Information
• Schedule R - Retirement Plan Information
• Schedule SB - Single-Employer Defined Benefit Plan Actuarial Information
Form 5500 always focuses on a benefit plan’s current liability, never on projected benefits. It provides an overview of the plan’s funding status in various ways.
Schedule H includes an asset and liability statement reporting the fund’s financial positions at the beginning and the end of the year. An income and expense statement must also be included. The plan sponsor must identify any changes in net assets for the year, as well as income or expenses for any trust(s) or separately maintained fund(s) and any payments/receipts to/from insurance carriers.
Identification of each person or entity who received, directly or indirectly, $5,000 or more in total compensation (i.e., money or anything else of monetary value) in connection with services rendered to the plan or the person's position with the plan during the plan year must be identified. This could include fund managers, accountants, actuaries, etc.
Form 5500 filings are publicly available at the Department of Labor’s website by looking for the “Form 5500/5500-SF Filing Search” feature.
Comparing the SEC Form 10-K with the DOL Form 5500
Many institutional investors ask how they can reconcile the pension and benefit information contained in the SEC’s Form 10-K with the Form 5500 DOL filing. The simple answer is that the data sets are different and are not intended to be reconciled.
The information contained in each document is correct, even though it is different, and companies are not trying to mislead investors with the separate data sets. From a regulatory standpoint, plan sponsors are required by law to disclose different views of pension liabilities to multiple audiences in varying formats.
The Form 5500 is particularly informative because it requires disclosure of the liability amount that must be funded at the present time. This number tells investors what the benefit obligation is now, including the extent to which current liabilities are funded. Industry guidelines generally consider a plan with a funded ratio of 80% or better to be healthy, although the American Academy of Actuaries points out that it is important to understand how a pension obligation is measured.
As mentioned above, the Form 10-K differs from the Form 5500 in that the 10-K includes projections of liabilities in future years. For this reason, the pension obligation reported in the 10-K is frequently much larger than the number reported in the Form 5500.
In summary, it is important for interested parties to read all disclosure data about a pension and benefit plan. Additionally, institutional investors and others will want to understand how the data is derived and how it can be reasonably interpreted.
ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.
ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
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