UNIVERSITY OF CALGARY

Accounting for Pensions

by

Darlene Himick

A THESIS

SUBMITTED TO THE FACULTY OF GRADUATE STUDIES

IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE

DEGREE OF DOCTOR OF PHILOSOPHY

HASKAYNE SCHOOL OF BUSINESS

CALGARY, ALBERTA

SEPTEMBER, 2010

© Darlene Himick 2010

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UNIVERSITY OF CALGARY

FACULTY OF GRADUATE STUDIES

The undersigned certify that they have read, and recommend to the Faculty of Graduate

Studies for acceptance, a thesis entitled ―Accounting for Pensions‖ submitted by Darlene

Himick, in partial fulfillment of the requirements for the degree of Doctor of Philosophy.

Supervisor, Dr. Dean Neu, York University

Dr. Jeff Everett, Haskayne School of Business

Dr. Abu Shiraz Rahaman, Haskayne School of Business

Dr. Ariel Ducey, Department of Sociology

External Examiner: Dr. Yves Gendron, Laval University

Date

i

Abstract

This dissertation examines the role of accounting in three different settings in which the cost of pension plans were at issue. The first study investigated the role of accounting in Chile during the dramatic switch from a country-wide defined benefit system to a privatized defined contribution system. In an archival study, the role of accounting was highlighted to show that it played a part in both the basic functioning of the system, but also in helping the government of Augusto Pinochet in changing the

Chilean society to introduce free market reforms. Without accounting to provide the mechanisms that enabled these reforms to work, the Pinochet regime would have had difficulty in institutionalizing itself as a legitimizing process.

The second study traced a genealogical history of accounting for pension costs in the United States. Its aim was to reveal the influence of the actuarial profession on accounting‘s development in this area, as well as point to just how socially embedded the accounting for pension costs was in this early time.

The third study was a case study of the field of pension ―governance‖, the processes grounded in legal notions of fiduciary obligations through which decisions about pension design must flow. Accounting‘s role in design takes place within this governance framework, thus the study‘s aim was to highlight the decision-making processes to provide context for thinking about how, and to what extent, accounting can influence pension strategy. ii

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Acknowledgements

This thesis would have not been possible without the unqualified support of my supervisor, Dr. Dean Neu, and my supervisory team members, Dr. Jeff Everett and Dr.

Abu Rahaman. They made the entire experience bearable and enjoyable.

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Dedication

This dissertation is dedicated to my son, Jack who is still too young to know just how much he inspires me.

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Table of Contents

Approval Page ...... ii Abstract ...... ii Acknowledgements ...... iv Dedication ...... v Table of Contents ...... vi List of Tables ...... viii

ACCOUNTING AND CHILEAN PENSION REFORM...... 1 1. Introduction ...... 1 2. Theoretical framework ...... 6 3. Background to the Chilean Political and Economic Circumstances at Reform ...... 8 4. The Pension System‘s Role in the Institutionalization of Chile ...... 12 4.1 Institutionalization and Modernization ...... 13 4.2 The AFP System ...... 14 5. Accounting and financial techniques in the operation of the new system ...... 15 5. 1 Financial Incentives ...... 16 5.2 Accounting Records and Recordkeeping ...... 18 5.3 Monitoring and Auditing ...... 19 5.3.1 Monitoring and Auditing Employers ...... 19 5.3.2 Monitoring and Auditing AFPs ...... 20 5.4 Investment Limits ...... 22 5.5 Rate of return calculations and performance indicators ...... 24 6. The system‘s role in broader objectives ...... 25 6.1 Privatisation Efforts ...... 26 6.2 Development of Capital Markets ...... 30 6.3 Attempting to change mentalities ...... 31 6.3.1. Resistance within the regime ...... 33 6.3.2 Resistance by Labour ...... 34 6.3.3 Resistance within the pension system ...... 36 7. Discussion ...... 37

DISJOINTED ACCOUNTING: PENSIONS IN THE U.S. 1900-1960...... 41 1. Introduction ...... 41 2. Analytical and Theoretical Framework – A Genealogy of Pension Accounting .....45 2.1 Accounting in Action ...... 45 2.2 Foucault‘s Power-Knowledge ...... 48 2.3 Method and Data ...... 52 3. The Institution of Industrial Pension Systems in the United States ...... 54 3.1 Accounting for Pensions – Early Ideas ...... 57 4. Necessary ingredients for pension accounting: the rise of actuarial science and a moral obligation ...... 58 vi

4.1 The entry of science: Privileging actuarial knowledge ...... 58 4.2 Imposing a moral and economic obligation on employers ...... 66 4.3 Reporting for pensions – power relations and the move to accrual accounting ...... 73 4.4 The first two Accounting Research Bulletins ...... 79 5. Epilogue ...... 82 6. Discussion and Conclusion ...... 84

ACCOUNTING DURING A LOST DECADE: THE ROLE OF ACCOUNTING IN THE MODERN GOVERNANCE OF INDUSTRIAL PENSIONS ...... 90 1. Introduction ...... 90 2. Accounting and Plan Design ...... 93 3. Theoretical Framework and Method ...... 98 3.1 Governmentality ...... 98 3.2 Method ...... 102 4. Analysis ...... 107 4.1. How accountings enter the programme level where it vies for attention with other competing rationalities...... 108 4.2. How accounting is adjudicated at the programme level where it competes with other rationalities ...... 113 4.2.1 Individual strategies ...... 114 4.2.2 Discomfort with knowledge levels ...... 116 4.2.3 HR Strategies ...... 119 4.3 Governance process ...... 120 5. Case: Resource Co ...... 127 5.1 Accounting first enters the programme ...... 129 5.2 Accounting competes ...... 130 5.3 Resistance transforms what can be done in the name of cost savings ...... 135 6. Conclusion ...... 137

REFERENCES ...... 141

APPENDIX A - CHILE: TIMELINE OF EVENTS ...... 151

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List of Tables

Table I.1 - Privatisation of Chilean Firms (1986-1990) ...... 27

Table II.1 - 1908 Fellowship Examination Subjects ...... 61

Table II.2 - Accounting and disclosure practices of pension plans 1952 ...... 76

Table III.1 - Cash flow and Accounting impacts of design options ...... 133

Appendix A - Chile: Timeline of Events ...... 151

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1

ACCOUNTING AND CHILEAN PENSION REFORM

1. Introduction

My ideas for social security reform were then part of an overall vision of a free market and a free society in Chile. (Piñera, 2005).

With issues such as aging demographics, improper management of pension assets, and the downfall of Enron and its pension plan collapse, the topic of pensions has captured the attention of public policy makers. Neither developed nor developing countries have been immune to this debate. Countries as disparate as Canada, Poland,

Argentina, and Sweden have all recently considered how best to handle the design and implementation of old-age security systems.

One of the touchstones in almost all of these debates has been the Chilean model of a privatised, national pension system.1 Twenty-five years ago under the military dictatorship of Augusto Pinochet, Chile reformed its state provided social security system to one based on a free market mentality and individual responsibility. Today, that system still stands – although its effectiveness has been a subject of continual debate. The model has been used as the template for pension reform globally, and its originator, José Piñera, has marketed it worldwide. The World Bank has adopted the model in its pension

1 The term ―privatised‖ is used within the pension reform terminology to refer to a system based on individual ownership of, and decision-making around, assets accumulating for retirement purposes (Mesa- Lago and Muller, 2002). This does not refer to the notion of the private versus public investment management of those assets, nor does it mean that the investment industry itself was denationalized.

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reforms in some 80 countries worldwide.2 Even the United States has looked to Chile for its own reform goals, with George W. Bush claiming it a ―great example‖ that his country could learn from. (Rohter, 2006). There is no question that the Chilean pension reform project reaches beyond its national borders.

Within this context, the present study attempts to answer two questions: first, how was accounting enlisted to implement the Chilean pension privatisation programme? And second, how was accounting used to enable the system to contribute to the broader objectives of modernization, institutionalisation and altering citizens‘ mentalities? The study uses archival data covering the period 1970 through the present. Of particular relevance are regulatory documents which outline the specific governance requirements for the system and reveal the financial techniques used since its inception. Included in the regulatory documentation are processes for calculations, reporting, auditing techniques and accountability requirements.

The study is important for several reasons. First, it should help us to understand the centrality of accounting techniques and calculations during the system‘s design and implementation. Given the visibility of current deliberations regarding pension reform worldwide, it is expected that this analysis will be useful to understand how techniques can be channelled towards their operations. Second, the Chilean model is uniquely positioned as one of the driving factors behind the ―spreading beliefs about the economic efficacy of pension privatisation‖, and as indicated, is the template for worldwide

2 The primary strategy is a three-pillar system, one of which is based on the model used in Chile, one other

3

reforms. (Madrid, 2005). This gives it a place of its own in terms of its importance in the pension and social security world, and makes it an important site for understanding how states and non-governmental organizations have worked, and continue to work, on

―reforming‖ social security worldwide.

The current study complements and extends our understanding of accounting as it has been studied in the context of three streams of literature; the governmentality literature as well as the literatures on privatisation efforts by states and ―reform‖ efforts by agencies such as the World Bank. First, the governmentality literature has primarily considered the techniques used by democratic establishments. This study hopes to extend that body of literature by examining the techniques of governance as they were used by a non-democratic dictatorship, specifically as it moved through the phase of gaining physical possession of a territory through to the technical ordering of that territory and its citizenry. The Pinochet government was a military regime in power for over a decade, which had attempted to eliminate opposition and thus had all tools at its disposal to order its domain. And yet, it similarly turned to the subtle techniques of accounting and financial tactics to effect is privatisation plans.

Second, privatisation literature has similarly been situated within the context of democratically elected governments facing numerous constraints and competing constituents. (Arnold and Cooper, 1999; Craig and Amernic, 2006; Shaoul, 1997). In

Pinochet‘s Chile, eliminating the democratic process and silencing formal avenues for

is normally based on a state provided safety net, and the third on voluntary savings. (World Bank, 1994).

4

opposition were official government policy. The results were ―laboratory conditions‖ while policy making was performed in secret. (Coad, 2006; Oppenheim, 2007). Yet, similarities to democratic regimes arose since this government still wanted ―buy-in‖ on certain aspects of privatisation, understanding that this would encourage its desired change in mentality for its citizens.

Third, an emerging stream of accounting literature has examined the way in which the World Bank continues to diffuse policies and import technologies into various settings with varying degrees of success. Highlighted in these studies is the idea that it is challenging to import systems without understanding the impact that the unique circumstances of the field will play on the potential for the system‘s success. (Annisette,

2002; Neu, et.al., 2006; Uddin and Hopper, 2001). Chile‘s government did not require the involvement of external agencies for funding or implementation. This has several implications. First, the government could do as it pleased without having to worry about satisfying these agencies, contributing to the laboratory conditions already mentioned.

Second, the government could consider the local circumstances in an indigenous design and implementation. Third, non-reliance was, in this particular case, associated with somewhat of an operational success story, in the sense that the system ―functioned‖ and experienced growth. But a ―success‖ in Chile does not mean success elsewhere. The present study adds to the stream of research that cautions against blanket application of reform mechanisms. The system became the Bank‘s model almost verbatim. Staff

Economist Hermann von Gersdorff, for example, in describing Colombia‘s proposal to reform its pension system stated that they ―…had taken the Chilean legislation and used a

5

computer search-and-replace function to substitute the word Colombia for Chile.‖

(Madrid, 2005). Studying the Chilean system offers an opportunity to understand the nucleus of the World Bank‘s model policy, which may raise the question why the Bank adopted a model that was created under conditions that were so politically and economically distinct from other fields where it intended to import the system.

The particular setting chosen, Chile during the time of the Pinochet regime, gives voice to a geographic area that is under-represented in the accounting literature.

Additionally, Chile‘s citizens were subordinated by virtue of being subjected to unilateral decisions about their social security provision without being provided the opportunity to voice dissent or opinion. Accounting research dedicated to giving voice to the under- represented has focused on anyone ―subordinate in terms of class, caste, age, gender and office or in any other way‖ (Neu, 2001). But additionally, accounting research has begun to explore under-represented geographies and move beyond a ―euro-centric‖ focus (Neu,

2001). It is the attempt to move beyond ―traditional histories‖ of the dominant groups

(both within a geography and relative to other geographies) that has driven much of the literature on subaltern studies and which this study proposes to contribute to.

As indicated throughout this paper, many traditional histories have focused on the functioning of the Chilean pension system in isolation, as a model that was, and could be, exported. By including the rest of Chile in the analysis, we are able to examine the larger role the pension reform played, and thus examine its (possible) unsuitability as a model for export. For the system only makes sense when examined in light of its intended role

6

as a means to bring about a change to society, including a change in mentalities and quelling future resistance in the form of left leaning political beliefs.

Thus, the privatisation of pensions in Chile represented one means by which a very small group of Chileans (Pinochet and his economic team) attempted to silence the rest of the populace under the rhetoric of free market reform. The rest of the populace, then, became Chile‘s subaltern within that country. And, Chile‘s story is part of an under- represented geographical and societal domain within the accounting literature.

2. Theoretical framework

This study‘s aim is a careful analysis of the techniques used to enable reform. In so doing, the study draws heavily on the notion that ―governance‖, according to Foucault, includes both the general and specific ―ensemble of institutions, calculations and tactics‖ deployed to arrange things in such a way that certain ends are achieved. (Foucault, 1991).

The military dictatorship of Augusto Pinochet used military force to overthrow the elected government of Salvadore Allende. It then spent the next fifteen years working through various forms of non-physical governance of the Chilean people. Physical force enabled the emergency overthrow but would be of little use in administering the lives and interactions of the citizens in such a way as to affect the change that Pinochet had in mind, which was to change mentalities. It is only when we consider the desire to move beyond the mere physical possession of the territory to the goals of introducing a new form of economy to the country, changing citizens‘ view of their past, and institutionalizing society, that we can understand the role that numerical, financial and

7

statistical tools have in producing these ends. Foucault describes the distinction between possessing territory and governing the domain:

...the definition of government … in no way refers to territory. One governs things. What government has to do with is not territory but rather a sort of complex composed of men and things. … men in their relations, their links, their imbrication with those other things which are wealth, resources, means of subsistence… (Foucault, 1991)

Thus, the regime had to move from ―the exercise of sovereignty over the territory and the subjects who inhabit it,‖ to something that would allow the regime behind it to achieve certain ends with regard to the people and things under its domain. Accounting‘s purpose within this framework was to act as a tool that, at a practical level, operationalized the systems of institutionalization that were required to move out of the realm of territorial possession, and also as a tool that accomplished even broader aims by virtue of its ability to act upon the mindsets of citizens.

The specific technologies of interest here are those ―apparently humble and mundane mechanisms‖ of accounting and auditing. (Miller and Rose, 1990). Within this theoretical framework, we can examine why accounting was so valuable. In some regards, it is not surprising that accounting was required. Pension administration requires a system of recordkeeping – one needs to account for the individual benefit entitlements.

But in this particular case, accounting was used well beyond a recordkeeping and administrative function. Here was a particular mode of governance that permeated the creation of regulation, and the usage of accounting reveals itself in how it perpetuated this governance style. For example, auditing and reporting requirements were heavy, and

8

in many cases the regulations were more intensive than in pensions systems elsewhere.

While there were apparent reasons for this (careful attention would be required to monitor the newly created capital market), it is clear that keeping tight control over the system‘s success resulted in heavy handed intervention, which was in contradiction of the notion of the invisible hand.

Additionally, accounting was used in making this system redesign become

―about‖ modernizing, and creating capital markets, rather than ―about‖ social security. Its use in enabling privatisation and the growth of the capital markets was clear. Without it, the necessary elements would be missing. The idea was a privatised pension system based on personal property ownership and the free market, and which was part of a broader aim. And accounting and its techniques became that ―way of acting upon the real, a way of devising techniques for inscribing it … in such a way as to make the domain in question susceptible to evaluation, calculation and intervention.‖ (Miller and Rose, 1990).

3. Background to the Chilean Political and Economic Circumstances at Reform

On September 11, 1973 the military junta led by Augusto Pinochet Ugarte carried out a military coup d‘état on the democratically elected socialist coalition government of

Salvadore Allende. Appendix A provides detail on the events leading up to the coup, and immediately thereafter. Over the next few months, the new authoritarian regime, which would govern the country for the next 17 years, began to entrench itself. The junta had no particular post-coup policy except to eliminate all traces of socialism. To this end, all political parties were disbanded, unions were reduced to a weakened state, with the ability to organize severely restricted, and physical control took hold. (Londregan, 2000;

9

Oppenheim, 2007; Stern, 2006). The Dirección de Inteligencia Nacional (DINA), was established to consolidate the regime‘s intelligence gathering and secret-police network.

The DINA was later implicated in the murder and torture of over 2,000 Chileans who had connections to the left. Most of these took place in the first few years of the regime, since by 1977 the unit was dissolved (Report of the Chilean National Commission on Truth and

Reconciliation, 1993).

In terms of economic policy, the regime inherited a protectionist, state managed, import-substitution economy. Internal debate in the junta was split between two economic coalitions: those favouring a gradualist approach in the move away from state protectionism and those favouring a more extreme policy. Shifting power relations between these two coalitions resulted in what has been recognized as two phases of economic policy making. (Oppenheim, 2007; Silva, 1993, 1996). Between 1973 and 1975 the gradualist coalition controlled economic policy, but the recession in 1975, combined with a lack of cohesiveness within the gradualist coalition led to an opening for the radical approach. Beginning with Milton Friedman‘s advice to Pinochet on ―shock treatment‖ to overcome inflation and further eliminate the government‘s role in the economy, 1975-1982 was a period when a group known as the ―Chicago Boys,‖ took over economic policy. These were economists trained in Chicago under Milton Friedman and Arnold Harberger, or at the Universidad Catolica under University of Chicago professors who taught under a formal exchange program with that institution. As stated by José Piñera, the mind behind the pension privatisation project and one of the Chicago

Boys:

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In April 1975, when Chile was facing a severe economic and political crisis, a team of classical liberal economists made a ―friendly takeover‖ of the economic policies of the military dictatorship. (Piñera, undated)

Pinochet saw in this group access to international financial capital and domestic capitalist powers, while they saw in him the opportunity to make over the economy while profiting via their dual positions on political and industrial platforms, since they were rotated into political seats from their positions in industry, and then back out again.

(Silva, 1993, 1996). Holding executive roles in the two dominant capitalist conglomerates

(Cruzat-Larrain and BHC), they benefited by having inside information regarding, and direct influence on, economic policy in the country. Indeed, they were the originators of policy.

José Piñera became Minister of Labour and Social Security (1978-1980) and

Minister of Mining (1980-1981). He presided over structural reforms in the pension and health insurance systems, devised a new labour code, and policies concerning property rights in the mining sector. He and other ministers also served on the executive of the

Cruzat-Larrain conglomerate, which in 1981 became the owner of Provida, one of the largest pension fund administration firms in Chile. (Borzutzky, 2003). His worldview is founded on individualism and the firm belief in property ownership as a driver of effort and aligning the interests of workers and capital.

The world would be a better place if every worker were also an owner of capital. ... The interests of the workers would be more in line with the interests of those who manage and control those assets, there would be less

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inequality of wealth…. Above all, workers would find a new dimension of freedom and dignity in their lives.

In most countries, workers are already compelled to contribute between 10 and 30 percent of their wages to pay- as-you-go retirement systems. The transformation of those unfunded systems into systems in which wealth is accumulated in individual accounts can bring about a new paradigm, a world of worker-capitalists.

This was our guiding vision when in 1980 we fully replaced the state-run pay-as-you-go pension system with one of personal retirement accounts that are owned individually and managed by the private sector. 3 (Piñera, 1997)

Piñera‘s new social security system was unveiled in May 1981 and comprised the

Administradora de Fondos de Pensiones (AFPs), a group of companies whose sole purpose was to administer and invest the pension assets, and the regulatory body,

Superintendente de Administradoras de Fondos de Pensiones (SAFP). The system provided that employees contribute 10% of their annual earnings which would be deposited in an account at an AFP of their choosing. Assets in the account would be invested in the single investment fund offered and managed by each AFP.

3 José Piñera is still active in the world of pension reform and has tirelessly promoted the model he created. He founded the International Center for Pension Reform in order to promote it, and currently travels the world via speaking engagements to discuss the model of individual personal retirement accounts. He believes there is a ―possibility of a breakthrough in the United States‖ and his six key arguments for introducing the system includes ―the moral argument‖ in which a pay as you go public system is a ―collectivist scheme that deprives individuals of freedom in organizing their lives and planning for their futures‖, and the ―social harmony argument‖ in which ―the privatization of social security would end the division between capitalists and workers by turning the United States into a country of worker-capitalists with consequent changes in the country‘s political dynamics.‖ (Piñera, 2007b)

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The system was a defined contribution design, in which the pension was an annuity purchased with the value of the employee‘s account at retirement. Thus, the account would need to be invested to grow its value by at least the level of inflation to avoid erosion of capital. By contrast, the former system was a defined benefit plan in which the government provided a specific benefit to employees at retirement. (SAFP,

2007) To fund the benefit, the government used a pay-as-you-go system, in which the current contributions made by working members paid for the benefits to current benefit recipients. This funding arrangement is said to reduce the potential for accumulated savings in the economy since cash flow is used immediately to pay for benefits. Also, it raises funding difficulties if demographics result in more recipients than contributors, or if benefits are increased without a proportionate increase in funding capabilities.4

4. The Pension System’s Role in the Institutionalization of Chile

The AFP market opened on May 1, 1981, which is Labor Day in Chile and most of the world. It was supposed to open May 4, but I made a last-minute change to May 1.

When my colleagues asked why, I explained that May 1 had always been celebrated all over the world as a day of class confrontation, when workers fight employers as if their interests were completely divergent. But in a free-market economy, their interests are convergent. "Let's begin this system on May 1," I said, "so that in the future, Labor Day

4 The other option is a funded plan, in which contributions are accumulated in a pension fund that is invested with the expectation that based on actuarial projections, the fund will have sufficient assets to pay out benefits as they come due. Although this type of financing avoids the above noted difficulties associated with pay-as-you-go systems, investing involves the risk that returns will be below expectation, which can result in the fund being insufficient to pay for future benefits.

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can be celebrated as a day when workers freed themselves from the state and moved to a privately managed capitalization system." That's what we did. (Piñera, 1995)

4.1 Institutionalization and Modernization

As time went on, the regime‘s claims to legitimacy had to change and it turned to a program to institutionalize itself. Institutionalization of the regime was to be understood as the development of specific rules and institutions that would ―(build) a modern and prosperous society‖ under a specific timeframe. (Londregan, 2000). Part of the process would include a new constitution which was described by its authors as including

―anticommunist values.‖ (Londregan, 2000). A second part became known as the Seven

Modernizations, which applied the free market to seven aspects of Chilean society: labour, agriculture, education, health, social security, justice and public administration.

(Oppenheim, 2007). Finally, the ―institutions of liberty‖ (Piñera, 2007a) were devised, which included a market economy, an independent central bank, a constitutional court and private television. Essentially these meant economic liberty, since other freedoms were suppressed. In support of these efforts, the education system would expand its curriculum in ―commercial engineering‖ fields (business administration and accounting), while dissolving departments within sociology and political science. (Kurtz, 2004; Levy,

1986). The pension reforms of 1981 were thus conceived within the broader context of remaking the whole of Chilean society. It is only within this context that we can appropriately understand the system‘s design and implementation since failure of the system would mean failure of one of the key components of the new institutionalization of the society – and the regime‘s continuation depended greatly upon its success.

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But first, at a micro level the system had to work. The next section presents the system and the accounting and financial techniques that enabled it to function.

4.2 The AFP System

Twelve AFPs were formed in 1981, but assets and workers were concentrated in the top three firms. Entry and exit over time has resulted in a high of 19 AFPs in 1994 and a low of six in 2006. (SAFP, 2007). Growth of the industry has been impressive.

AFPs began the reform era with 11 billion pesos after the first year, and by 2006 assets had grown to 46,677 billion. The AFPs‘ relative importance to the economy as a whole is represented by the fact that in 1981, system assets represented a mere 0.8% of the country‘s GDP, but by the end of 2006 this had climbed to 60%.

They quickly became the largest minority shareholders in the country and by virtue of their size developed the ability to move market prices when acquiring a new issue for the first time. (Jacobsen, 1997). For the first few years the funds experienced very high rates of return. Between 1981-1991, the average annual rate of return to the system as a whole was 16.6%,5 however high interest rates prevailing at the time combined with the investments in government bonds, some of which were linked to inflation (which was high) contributed to these results. Regardless, the high rates of return were used to promote the system‘s success, and in some regards obscured the need to address some of its problems. (Jacobsen, 1997).

5 Author‘s calculations based on data from SAFP (2007).

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Although the industry was created with the idea of competition, and within the stated aims of hands-off government policy, it has been subjected to competition-stifling regulation. The rigid investment regulations along with the requirement to converge to investment returns at the level of the industry average, have combined to produce homogenous performance, with the correlation among AFP investment returns at 0.98 historically. (Srinivas, et. al., 2000). This raises the question why more than one AFP was required.

AFP revenues are essentially worker-paid commissions on assets. Commission rates are freely set by each AFP and include both fixed and variable proportions.6 In response to this revenue source, the industry developed an active sales force whose purpose it was to convince workers to switch AFPs. Indeed, even though the primary business activity of the AFPs was administration and investment of assets, Sales and

Marketing expenses have been as high as, or higher than, administration expenses as a proportion of operating expenses in 14 of the 25 years between 1981-2006. 7

5. Accounting and financial techniques in the operation of the new system

...the functioning of the Pension System involves handling a large quantity of information and this means having suitable computer networks and information systems, plus mechanisms for identifying the workers. In this way it is possible to keep an appropriate check on the processes to be carried out by the Administrators, and also to avoid potential anomalies. (SAFP, 2004).

6 Thus, for lower income earners, the fixed fee component is regressive. 7 Author‘s calculations based on date from SAFP ( 2007).

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This section examines the various financial techniques that were used to operationalize and control the system at inception. Despite the notion of the invisible hand, it will be seen that several layers of monitoring and calculative techniques were used to control the system‘s results and outcome.

We set up such transitional rules with a bias for safety because our plan was to be radical (even revolutionary) in approach but conservative and prudent in execution. We trust the private sector, but we are not naive. If the system had failed in the first years, we would never have been able to try it again. (Piñera, 1995)

The government wanted the system to function as a competitive industry, but as a competing goal, it also wanted to control the outcome since leaving it open to a truly

―free‖ market would entail risks it was not prepared to take. The governance structure here required a balance between radical reform and risk management and control.

5. 1 Financial Incentives

Financial incentives were used to encourage behaviours within the system. The first item of business would be to decide whether to force all workers to join, and the policy adopted was to give workers already in the old system a one-time choice between the old and new models, and make it mandatory for all new entrants to join the reformed model. Voluntary transfer had the ―advantage of validating the new System, since becoming a member of the scheme was a matter for each individual. It also produced less pressure on the state budget and fewer operational problems.‖8 (SAFP, 2004).

8 Although there is some question here since the new model added the complexity of sorting and reporting workers into old versus new system.

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However, the government preferred that workers choose the new model and set about encouraging this outcome. Advertising campaigns stressed the benefits of reform, and discredited the old system.9 Financial incentives, in the form of an effective increase in net pay, were employed. 10 Employers were required to effectively increase salaries by

17% to make it clear that former employer contributions were considered to be a component of wages. The average contribution for pensions in the old system was 22.4% of salary, while this contribution averaged 12.7% in the new system.11 By the end of Year one, 1,400,000 Chileans had joined the new system, and 732,000 remained in the old system (SAFP, 2004.

Financial incentives were also used to enlist AFPs in the role of monitor. AFPs had to formally report employers who had failed to pass along employee contributions in the AFP‘s financial statements. These had to account for three issues: declared but unpaid contributions; unpaid contributions resulting from non-tallying payrolls; and non- declared and unpaid contributions. Only after reporting were they able to collect fees, and further, only on those contributions for which the associated cash had been deposited into the employee‘s account.

9 In one advertisement, the person who did not change to the new system was described as ―a quedado, or someone who was not smart enough to understand that the new approach was better and more modern.‖ (Borzutzky, 2005). 10 Those who switched were given a "recognition bond" that was deposited in their new personal accounts. This was a zero-coupon Treasury bill, maturing at the employee‘s legal retirement age, indexed to inflation and carrying a 4 percent real interest rate. 11 New contributions comprised 10% mandatory contribution plus average fees of 2.66% charged to employees. When workers changed systems, their net salary increased by 12.6% = (1-0.1266)(1- 0.2244)*100.

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5.2 Accounting Records and Recordkeeping

Prior to reform there were 32 Social Security Institutions (SSI), covering all forms of social security benefit provision (pensions, health and industrial accidents).

Contribution rates and benefits paid varied according to the SSI. The former system required two items from employers: cash contributions and information needed to calculate benefit payments.12 These would flow from employer to SSI as inputs to the benefits, but complicating the matter for the employers was that each SSI had a different formula for determining benefits, thus requiring different information. 13

Employer reporting would change once there would be two categories of employees: those remaining in the old and those moving to the new system. Although aggregating the 32 SSIs under one umbrella entity, the Instituto INP, facilitated this transition, each SSI‘s benefit formula and contribution requirements remained intact. The

12 Since the benefit is calculated based on formulae incorporating years of service and wages earned. 13Pension benefit formulae under the old system for the three largest SSIs, illustrating differences in reporting requirements by employers:

Institution Requirement for Pension Entitlement Amount SSS Man: 65 years 50% BS(1) + Woman: 55 years 1% of BS(1) for each 50 weeks in 800 weeks contributions excess of the first 500 Not exceeding 7% of BS(1) Canaempu Men and women: 65 years BS(2)*Years of service/30 10 years contributions Not exceeding BS(2) Empart Men: 65 years BS(3)*Years of contributions/35 Women: 65 years minus 1 year for each 5 Not exceeding BS(3) years service with a maximum of 5 BS(1) = Basic Monthly Salary(1): Sum of taxable wages and other income in the last five years divided by sixty, the last three years being readjusted according to the increase in the average subsidized wage. BS(2) = Basic Monthly Salary(2): Average of the wages of the last 36 months. BS(3) = Basic Monthly Salary(3): Average of the wages of the last 60 months prior to the moment of receiving the benefit, the last 24 moths being readjusted according to the increase in the living wage.

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new system had a mandatory, employee-paid, contribution of 10% of taxable wages.

Benefits were no longer calculated since they were the value of employee accounts over time. 14 Hence, employers would classify a worker as old or new system, and then forward the required information and cash flow to either the Instituto INP or the worker‘s chosen AFP, as appropriate.

At this point of the system‘s development, only a moderate change in reporting requirements was needed, and payroll records, wages and years of service, were used both in pre-reform and post-reform eras to represent characteristics about each worker that could then be input into a calculation process at the other side of which a financial entitlement would arise.

5.3 Monitoring and Auditing

5.3.1 Monitoring and Auditing Employers

Of critical importance post-reform was accuracy in reporting of contributions, and submission of related cash flows. Not only would errors impact a worker‘s accumulated balance at retirement, but inaccurate reporting of contributions would impact their right to claim the government‘s guarantee of a minimum pension, which requires twenty years

Source: SAFP (2004). 14 Reduction in employer contribution and implementation of a single contribution rate for employees resulted in a more streamlined reporting system for employers. However, employees still members of the former system would present reporting challenges for employers. The following presents Employer and Worker contribution rates (% of pensionable income) under the old and new systems for two of the pension systems in place prior to reform SSS Empart New Year Worker Employer Total Worker Employer Total Worker 1981 7.25 25.95 33.20 12.33 28.71 41.04 1981 10.00

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of contributions. 15 Additionally, the submission of cash would directly impact the channelling of assets into the capital markets. Employers were thus required to submit contributions within the first ten days of the month. This would ensure that the cash moved as needed within the system, and assist the timely deposit of cash flows into members‘ accounts so that investment earnings could begin to accrue. Over time, it became recognized that employers facing liquidity issues were unable or unwilling to comply. True to the notion that ―government is a congenitally failing operation‖, (Miller and Rose, 1990), the state changed this requirement in 1982, permitting employers to declare contributions without having to submit the associated cash flow until a later date.

To monitor employer compliance the government enlisted the AFPs in an audit function. AFPs would monitor the contribution cash flows and institute collection proceedings against employers who failed to submit them. They updated employees‘ individual accounts on a monthly basis to reconcile contributions declared and cash received. Once notifying the Labor Department about employers who had not paid or declared contributions they were then permitted to take steps to collect. 16

5.3.2 Monitoring and Auditing AFPs

Although effectively unknown in terms of their ability to perform what was required of them in the new system, the AFP industry was afforded a significant role.

Hence, the government took a leap of faith in transferring essentially all investment and

Source: SAFP (2004). 15 SAFP (2004). The minimum pension was set as a proportion of the minimum wage and is adjusted for inflation. If the member has made 20 years of contributions to the system, and the balance in the account is not adequate to buy a life annuity that pays at least an amount equal to the minimum pension, the State would make up the difference.

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administration functions to this collection of privately managed firms. Permitting these firms to have free reign within the new and fragile system would open it up to potential failure. To begin with, the government created the SAFP as the supervisory body to oversee the system as an autonomous government organization, formally linked to the

Ministry of Labour and Social Security, but without reporting obligations to this

Ministry.

Auditing was performed primarily under the auspices of two separate departments, the Finance Division and the Control Division.17 The Finance Division monitored the AFPs‘ financial activities via a stringent off-site, centralized surveillance system, interacting closely with the finance staff of all AFPs. Since the main purpose of the AFPs was to invest the assets of the pension accounts, the Finance Department‘s primary interest was to ensure that this investment activity remained within the bounds of legal requirements.

First, pension fund portfolios were marked to market on a daily basis, and the

SAFP was directly involved, calculating a vector of daily asset prices which was forwarded to the AFPs, its application then monitored. Second, the SAFP controlled the

―required‖ rate of return for the AFPs. Each AFP was required to achieve a minimum of either 50% of the average, or 2% lower than the average, subject to a maximum which of

50% above the average or greater than 2% (the target resulting in the widest range around

16 To aid them in this process they were given the right to institute legal proceedings against employers. 17 The Risk Measurement Committee plays a secondary audit role in assessing and auditing the suitability of potential investments.

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the average would be used). If the fund fell short of the minimum return, the AFP would be required to make up the difference by withdrawing funds from reserves. If the return was above the maximum a deposit to the reserve account was required. A second reserve account was also required as a backup to the primary reserve account, in an equivalent to

1% of the pension assets under its management, and funded out of its own operations.

(SAFP, 2004).

The regulations imposed on the AFPs reveal accounting‘s use to represent, judge, and intervene. Reserve accounts represented segregated assets for risk management to address government‘s concerns with financial risk in the system. Judging the performance of individual AFPs against the system average resulted in classifications of over or under-performers. Finally, when outliers were detected, intervention was imposed in the form of financial measures to correct the deviation, or in cases where a deficit was not covered or if reserves were not replenished as required, the SAFP was able to take action to liquidate the AFP. Accounting worked within the system to prevent poor performance, rogue investment activities or outliers from causing failure or distrust in the system. The chosen techniques reveal a level of intervention which in many ways ran counter to the proclamations of the free market and invisible hand.

5.4 Investment Limits

Since inception of the programme, one of the primary monitoring tactics has been the enforcement of strict limits on the nature and type of investments held by the AFPs in their investment portfolios. This has had numerous implications for the system‘s development, and for its role in furthering broader policy goals. The evolution of the

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limits reveals particular policy goals, rather than the application of financial portfolio theory and free and open competition.18 Thus, despite the idea of competition among the

AFPs, their ability to compete based on investment return was constrained by investment portfolios limited to particular vehicles and asset classes. At the system‘s inception, the upper bound limits were: 100 percent government instruments, 40 percent short term deposits, 60 percent corporate bonds and 20 percent shares of other pension funds.

(SAFP, 2004) No investment in corporate equity was permitted. These limits changed over time, in accordance with specific policy goals. For example, in 1985, up to 30 percent of the portfolio could be invested in the shares of specific firms that were being privatised. Of note is that the AFPs were unable to invest outside the country until 1992, when a modest 3 percent of the assets were permitted in foreign securities, which has been partially responsible for their contribution to domestic investment growth and support of the domestic productive sector.

The use of financial constraints such as these raises a number of interesting issues.

First, they are stringent relative to those in other developed pension systems. They are explained somewhat by Chile‘s relatively immature capital markets which may have

18 Portfolio theory would suggest that any constraints on asset allocation decisions would limit the ability to find the portfolios lying closest to the efficient frontier which theoretically enable the highest potential rate of return for the lowest level of volatility risk. However, asset allocation restrictions have been implemented in other countries to affect specific policy objectives. For example, in Canada it had been a requirement until 2005 that pension funds could not receive tax exempt status if they invested more than 30% of the book value of their portfolio outside of the country. Limits have also been tightened or loosened to prohibit or encourage investment in particular vehicles and asset classes over time in various jurisdictions. What makes the Chilean case interesting is the specific public espousal of the invisible hand, and the distrust of government intervention, in the face of the highly restrictive investment allocation limits

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needed attention to ensure safety of capital. What is interesting is how inconsistent this is with the supposed hands-off government policy, and the broader idea of free competition.

Beyond protectionism, investment regulation is susceptible to political manoeuvring and

AFP portfolios have long been dominated by government-issued securities. Additionally, there is no formal mechanism by which employees can voice objection to these regulations which tightly control the investment opportunity set for their assets.

(Jacobsen, 1997). Those who make the decisions on their behalf about what is ―suitable‖ are not accountable to these employees, which contradicts the notion of free choice and brings into question the idea of the compulsory notion of this system.

5.5 Rate of return calculations and performance indicators

The bottom line is that a worker can determine his desired pension and retirement age in the same way one can order a tailor-made suit. (Piñera, 1997).

This optimistic notion, which has proven to be difficult to achieve, was based on the active involvement of workers. They would need to change from passive recipients of a pre-determined pension to active decision-makers based on the financial information provided, which was comparative data about the returns of the AFP portfolio in which they were invested and the fees they were paying. Central to this responsibility was the requirement that they learn to monitor this performance and assess the decision to remain affiliated with their chosen AFP, especially in the face of sales tactics tempting them to switch.

which froze out the ability for the AFPs to compete on investment return. Essentially, the government‘s

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AFPs provided various financial planning data. Each worker was given an account passbook, and every three months received a statement documenting the value of her investment account as well as the return achieved. In the branch offices of the AFPs, tools (which are now computer based) permitted the worker to calculate her expected level of pension income and the amount that must be deposited to achieve that under certain economic assumptions. Financial techniques worked here to translate the broad policy of developing an individualized system in which workers would develop the language and mindset of the market, into the everyday experience of the worker. In this regard at least, the goal was achieved.

6. The system’s role in broader objectives

In addition to supporting the implementation and operation of the system, accounting played a role both directly and indirectly in the attempt to achieve the broader policy objectives of the regime. Directly, accounting was a facilitator to achieve privatisation of nationalised firms. It also provided the means by which capital was funnelled through the newly developed capital market system, and even provided the auditing and reporting techniques required of newly privatised companies. Indirectly, it enabled the pension system itself to play an important role in the establishing a free market mindset in Chile. Whether, and to what extent, the regime succeeded at these is debatable but this section highlights the broader aims and the role of accounting and finance therein.

view that the system remained safe trumped its ideal of a completely free market.

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6.1 Privatisation Efforts

Between 1974 and 1990, the Chilean government privatized over 500 public sector entities, including all but a handful of the country's largest corporations. Efforts proceeded in two phases, the first from 1974-1978 which pre-dated the pension reform, and the second from 1986-1990. The first phase involved the return of 257 firms and

3,700 farms that had been confiscated under the Allende regime to their former owners.

It also involved the reprivatisation of other commercial firms and banks so that while at the beginning of the military regime in 1973, there were more than 500 firms and banks under state control, by the end of the first phase (which ended in 1978), only 45 firms remained in the public sphere. During the first phase, Chile‘s capital markets were insufficiently developed to play a role in any broad based market participation mechanism. Thus, concentrated ownership by those who could participate (a handful of conglomerates and private agents) dominated. (Meller, 1993)

The economic downturn in the late 1970s resulted in the government rescuing the privatised firms, which eventually precipitated the need to later go through a second round of privatisations. Although the first phase was essentially debt-led (most of the firms had been acquired via debt financing of roughly 80% of the cost), and the high concentration in ownership resulted in dependence upon the largest corporate conglomerates, the second round had property dissemination and equity ownership via the newly developed capital markets as guiding forces. Table 1 presents the privatised firms along with the mechanism used.

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The pension system contributed in two ways. First, AFPs became institutional shareholders when the investment limits were changed to permit them to invest a portion of their assets in the shares of public companies which were in the process of privatization.19 Second, employees were able to purchase shares and to fund their purchases out of the assets they had accumulated in their pension accounts. Both of these reveal the explicit dual role of the pension system: accounts were intended to be savings vehicles for retirement but were opened up to serve the broader aim of privatisation; while AFPs were used as capital markets facilitators.

Table I.1 - Privatisation of Chilean Firms (1986-1990)

Public Firms Activity Privatisation Mechanism

Stock Employees Private

Exchange Auction

CAP Steel refinery X X

COFOMAP Forestry X

Chile Films Movies X

Chilmetro Electr. Distr. X X

Chilgener Electr. Gener. X X

19 Once again, regulation was put in place to ensure control. Only 5% of the portfolio of each AFP was allowed to be invested in shares of the privatised firms, and limits were placed on the percentage of shares that could be acquired in a single firm.

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Chiquiota Electr. Distr. X X

CTC Telephone X X X

ECOM Computer X

Edelmag Electr. Distr. X X

Delnor Electr. Distr. X X

Elecda Electr. Distr. X X

Eliqsa Electr. Distr.

Emelari Electr. Distr. X X X

Emec Electr. Distr. X X

Emel Electr. Distr. X

Enacar Coal X X

Enaex Explosives X

ENDESA Electr. Distr. X X

ENTEL Telecommunications X X

IANSA Sugar refinery X X

ISE Gen. Insurance X X

ISE Vida Insurance X X

Labor.Chile Pharmaceuticals X X

LAN Chile Airline X X X

Pehuenche Electr. Gen. X

Pitmaiquen Electr. Gen. X

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Pullinque Electr. Gen. X

Sacret Financial credit

SOQUIMICH Motrate X X

Shwager Coal X X

Telex Telecommun X

Source: Meller (1993)

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6.2 Development of Capital Markets

When establishing an individual capitalization system in which private institutions manage money belonging to contributing workers by investment in the capital market, it is vital to have enough alternatives to make it possible to invest the large quantities of money accumulated by the pension funds. In other words, it is desirable to have a capital market that is already sufficiently developed before the Individual

Capitalization System is implemented, even though the Funds themselves facilitate the development of the capital market by their participation in it. (SAFP, 2004)

It is well recognized that one of the aims of the private pension systems is to promote the growth and development of the capital markets, including boosting savings levels and investment. Chile‘s importance as a role model for driving reform stems partly from its ability to show a massive increase in private savings in the years immediately following privatisation. (Madrid, 2002). Indeed, some Latin American political representatives have stated that reform of social security was not necessarily driven by the issues related to social security, but rather by the desire to stimulate savings and investment. For example, former Bolivian President Gonzalo Sanchez de Losada has stated that the system would result in the creation of ―...domestic savings, capital formation, a stock and bond market almost overnight.‖ (Madrid, 2002).

However, these developments would be possible only via the techniques of accounting and financial tools. Accounting operationalized the pension system that would be the catalyst for creating and growing the capital market. It also provided the means to

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account for, report, and develop the tools related to the functioning of the savings, stock and bond markets that were so sought after.

6.3 Attempting to change mentalities

What Pinochet and the Chicago Boys intended to do was to change the way

Chileans thought about the world, their very mentality. They wanted the market approach, the belief in individual action rather than state responsibility, to permeate all of society. This was the real revolution. (Oppenheim, 2007)

The regime, as noted, moved from a phase of control via force, to a phased-in process of modernization with the aim to make over the very mindsets of the populace.

To some degree, it succeeded. Even socialist leaders in present day Chile do not now question the notion of private property, and have not reversed the privatisations of firms.

(Meller, 2003). The pension system is still essentially intact, albeit with acceptance that it contains many fundamental flaws that require state involvement to assist in its improvement. (Rohter, 2006). The capital markets are functioning and many Chileans have learned to become ―investors‖ with the language of the markets incorporated into their vocabulary. For example, members of the system now must make decisions based on rates of return comparisons among the AFPs and the composition and asset allocation of funds offered. These are offered via the SAFP oversight agency as well as prominently displayed on the websites of individual AFPs.

However, the path to these changes was not smooth for the regime, since, in many cases, Chileans did not passively accept that which was being imposed upon them. And,

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even though the regime sought to stifle voices of objection by legal suppression, as well as eliminating democratic venues, political parties and the freedom to organize and protest, subaltern voices made their presence known in non-formal venues.20 Voices that were marginalized in this way by the regime constituted Chile‘s subaltern, and the subaltern found ways to be heard.

When Pinochet‘s regime began the process of institutionalization including the

Seven Modernizations, many Chileans understood that the regime was entrenching itself and dug in for a long battle, giving rise to ―counter official Chile‖ (Stern, 2007), which used small means to build resistance. The voices circulated throughout society despite the fact that obliterating them was a stated goal of the regime.21

―However much the DINA sought to cut out knots of dissident memory, it could not flatten the body politic into a smoothly compliant organism that would echo official truths. Contentious memory knots kept forming and pushing debate about truth and reality into the public imaginary. Persons of conscience, including journalists, built counter official readings of past and present in select print and radio media.‖ (Stern, 2006)

20 For further accounts of the voices that made themselves heard through what channels they could find, see Aguilera and Fredes (2003) who present an anthology of stories, poetry and other non-official accounts from those who were present on the day of the coup, including those who were imprisoned and later executed but who managed to smuggle out their accounts which are published in this collection. Also, Stern (2006) provides an excellent, detailed account of many of these ―memory knots.‖ 21 Humour and ―absurdism‖ were utilized. For example, one of many jokes about Pinochet: Pinochet went to the movies, dressed up as an old lady so that he could see for himself how people reacted when his image appeared on the movie screen. Whenever he appeared on the screen, people applauded and applauded. He was enthralled, delighted, fascinated – until a person poked him and said ―Silly old lady, hurry up and clap or they‘ll shoot you!‖ Abusurdism surfaced in the journalism and media circles: the radio show Face to Face decided to ‗comment‘ on censorship by introducing the show with normal fanfare, after which they would read two or three minutes of UPI cables. They would deliver news that was ―ridiculous for the Chilean listener, like the victory of the Pittsburgh Pirates over the San Fransisco Giants, in baseball.‖ (Stern, 2006)

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The point would become clear: it would prove to be difficult to achieve a change in mentality when the democratic process enabling debate on the policies themselves was removed. Even Friedman noted the inherent contradiction in Chile: that of espousing economic freedom without corresponding political freedoms. (Oppenheim, 2007).

Central to this were the forms of resistance arising in various pockets of society as voices from all sides, that had been suppressed, began to get louder.

6.3.1. Resistance within the regime

The pension reforms described herein were part of the overhaul to the economy and society under the influence of the neo-liberal think tank in place. However, in the first few years of the Pinochet regime, the pension system had been moderately tweaked during the early phase of gradualist economic policy. Once these gradualists were replaced with the neo-liberal cohort more radical policy began to take shape and policy- making became closed-door and extreme. However, even the non-consultative policy making did not eliminate all dissent. Resistance to the reforms came from several sources: the military; bureaucratic managers of the former SSI pension systems; labour

(even though their opportunity to formally voice opposition was non-existent); opposition political parties (via non-official channels); and social security policy specialists.

Although most of these voices were marginalized via legal or physical force,22 some warranted attention. Gustavo Leigh was one such voice. The air force leader who had been against economic shock policy, went public in the Italian media about his

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concerns with the Pinochet leadership, and there is some evidence he had jointly planned a coup with other military officers. Pinochet removed him from office. The military, however, was a very strong voice that essentially refused to adopt the new system. They were the only group who succeeded in keeping their old, defined benefit, pension system intact, indicating their relative strength within the regime.

6.3.2 Resistance by Labour

Labour was suppressed by the elimination of both bargaining rights and minimum wages, and reversals of prior gains in dismissal rights. Unions also were given no voice at the table for the new pension system and no particular role in its ultimate design. In fact, their traditional role was eliminated. (Ghilarducci and Ledesma, 2000; Stern, 2006; Tear and Collins, 1995). The system removed employer contributions, reducing the need for unions to mediate the relationship between worker and employer, and moving it in the realm of the economic since the AFPs became collection agents.

This was true for all workers, but Kurtz (2004) argues that the pension reform impacted Chile‘s rural social landscape more harshly. Under the former system, the state was an alternative provider of social services, lessening the dependence and vulnerability of the rural peasant upon its landlord for these services. Social security involvement gave workers an opportunity to rely on political action to force landlords to make their required contributions. Additionally, the former system had provided benefits according to broad social and employment categorizations, resulting in collective action under these

22 For example, four labour leaders who were given an audience with policy makers were removed from the

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shared interests. Reform divided these interests, since issues were no longer a result of meaningful categorizations, but rather of the particular relationship between individual worker and AFP. Indeed, pension and social security conflicts were no longer common to the workers at a single firm, or even within a single industry. A key catalyst for labour solidarity had been, somewhat successfully, removed.

Although labour was transformed from a powerhouse to impotence, it would work to regain strength. Workers used informal means to organize and communicate, and there is evidence that they promoted the sacrifice of shorter term economic issues in favour of one more pressing: to bring down the regime itself. Thus, the suppression of labour ignited the desire to regroup with even greater scope.23 Its voice would grow, with tentative steps such as the refusal of copper workers (who under Allende‘s rule had been powerful enough to shut industry down for 63 days), to patronize the company dining hall in August 1978, and the next evening‘s banging of pots by the women of that community. (Stern, 2004). The symbolism cannot be lost here: women had banged pots to protest Allende‘s policies, (an act that did not go unnoticed even by Pinochet himself who remarked about it in his memoirs, (Pinochet, 1982), and now were marking their frustration with Pinochet, whose regime had created new frustrations for them.

meeting and then removed from their positions after disagreeing too heartily. (Stern, 2006). 23 Educacion y Comunicaciones ―ECO‖ was a young historians group that showed a slide show of the ―history of the Worker Movement‖, which presented the Chilean experience with social and labour struggles. The show was popular and elicited commentary that revealed citizens‘ understanding that the period was one moment in history that they would overcome.

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6.3.3 Resistance within the pension system

Lowering the visibility of the new system‘s potential disadvantages is a strategy aimed at reducing resistance, and one method to lower visibility is to increase the complexity of the system. (Mesa-Lago and Muller, 2002). Accounting plays a role here since complexity can be increased with financial terminology that is generally not well understood by citizens who are not familiar with it. This would be particularly so for a citizenry who had little prior experience with investing and the capital markets.

Accounting systems produced data that could reveal positive features and alter the perception of negative features.

In the face of the attempt to suppress objections or hide negative features, once provided with the opportunity to voice dissent, citizens made it clear that they had concerns. These were officially addressed in the AFP document entitled The AFP System:

Myths and Realities. It identifies twelve myths such as: ―the AFP system has no place for solidarity‖; ―the AFP system is less transparent than it should be‖; and ―the AFPs make a profit even when the workers make a loss.‖ Next, a ―reality‖ is presented, which uses the system‘s financial data to dispute each myth. (The Chilean AFP Association, 2004).

Two conclusions may be drawn from this. First, the language of the country now incorporates the notions of the market and the system; even voices of dissent communicate using this language. Concerns raised by citizens addressed profitability of the AFPs, competition among AFPs, pension benefit formulae, and fiscal spending on pensions. Second, accounting became useful to the system‘s proponents to reveal certain aspects and conceal others. Rates of return, asset levels, savings levels, coverage data,

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commission rates, and even the numbers of statements produced and sent to members‘ homes, are all used here.

The system produced other forms of resistance. Employers showed delinquent reporting and evasion in their responsibilities. The self-employed, who had the option to join, typically opted to not join the system. Evasion of the system within the formal economy by both workers and employers was, and remains, prevalent. (De Mesa and

Bertranou, 1997; SAFP, 2004; Soto, 2005). And workers have shown less than enthusiastic interest in their ―property‖ (the pension accounts), given data indicating that many are unaware of, and uninterested in, the basic features of the system, including items that directly impact their decisions about which AFP to select. (SAFP, 2004).

These forms of resistance and passivity underscore that for whatever reason, the system has not been enthusiastically adopted by all.

7. Discussion

This study has used the reform of Chile‘s pension system as the setting to show how accounting was enlisted to implement a pension privatisation programme, and secondly, how it was used as part of the political regime‘s broader goals of reforming

Chilean society and changing the mentalities of its citizens. It began with the notion that states start from abstract policy goals that require certain techniques in order to shape the behaviours of ―men in their relation with....things‖ (Foucault, 1991) so that the abstract becomes practical. Part of this is the idea that governance means more than physical possession of territory. Focusing on two of the state‘s policy objectives, to privatize the pension system and to use the system to further its broader aims, the study has put forth

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the various technologies of governance that were used to shape behaviours, and organize space, so as to turn abstract ideas into daily life and to solidify its rule by moving from the physical to the institutional. Additionally, by ensuring that the story has included the perspective of Chilean citizens and the way in which the techniques of governance worked within this setting to change mentalities and thus quell resistance, an alternative history of the Chilean pension reform is presented. Chile and the South American region is under-represented in accounting literature, and Chile‘s citizens were subordinate to the authoritarian regime during Pinochet‘s era.

The study has drawn from Foucault‘s belief that in order to effectively govern, the interactions by and among people and things in the domain must be managed, monitored and measured. (Foucault, 1991). In the work on governmentality, Rose posits that frequently it is the numerical that is used to provide the means to be able order these interactions. Thus, the theoretical position grounded in the notions of governmentality has provided us with a vantage point wherein we may better understand how it was that the tools and techniques chosen and used by the state were actually put into practice to facilitate the programme‘s usage in an everyday sense.

To perform the analysis, the study provided empirical level detail showing the specific techniques used throughout the system‘s design and implementation. Employers were enlisted to provide the reporting and transfer of cash flows on contributions.

Employees were expected to learn the language and features of the market by being faced with information and choices to make concerning their accounts. In this way, the

―market‖ was introduced to social security as part of the broader goal of modernizing the country. Free competition and the removal of government from daily life was the mantra,

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yet it was also recognized that financial and accounting tactics would be needed to retain control over the newly competitive marketplace via rate of return monitoring, auditing processes and accountability mechanisms.

The study has contributed to the governmentality literature and the privatisation literatures by offering analysis of the implementation and consequences of a privatisation programme under a military dictatorship. Accounting literature grounded in governmentality has tended to focus on organizations or states that work within a democratic environment in governance. That was not the case here, and yet the same tools and techniques were in play. This adds to the governmentality literature that has looked at ordering and implementing social programmes, via the detailed empirical examination of the technologies of governance used here to not only initiate and implement, but also to explicitly change mentalities and thinking on the issue, and as a means to move from physical possession of territory to institutionalisation of a regime.

The paper adds to privatisation literature that has thus far dealt with the efforts of democratic institutions in implementing privatisation programmes. In this literature, the existence of competing constituents has been offered as challenges to states in their efforts. Thus, privatisation programmes have been subjected to ―sales pitches,‖ including the use of accounting-based and efficiency arguments. (Arnold and Cooper, 1999; Craig and Amernic, 2006). This study has shown how a privatisation programme might be implemented under laboratory conditions, where competing voices have been deliberately shut out. It has also shown that those voices tended to emerge where suppressed, albeit in more subtle forms.

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As suggested, as the setting in which the World Bank and other states learned the model which was then exported around the world, Chile is a important site for the study of the diffusion of practices of governance technologies by both states and agencies.

Understanding what techniques were used, and, importantly, why they were used in this setting, will aid in helping policy makers learn the connectedness between the governance system adopted here and the particularities of the regime in place. Its introduction in Chile was very specifically crafted to address the institutional and political setting in that time and place. Thus, it presents a mix of market and interventionist reforms, but predicated on the need to ―force‖ a market system on this country. The controls in place were therefore not necessarily all ―about‖ its effective functioning in the same way that they might be when imposed within a country in which the market already plays a prominent role in the economy. Hence, it is likely that not everything in this particular system will ―work‖ in another setting, either because the controls here would be viewed as too interventionist or unnecessary. The system is still in place today, and it is still a model being used by states and agencies worldwide. It is essential to understand it in the fullest possible manner in conjunction with its global export. The aim of this study has been to contribute to such understanding.

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DISJOINTED ACCOUNTING: PENSIONS IN THE U.S. 1900-1960

1. Introduction

Out of the economic upheaval of the 1930s and the fiery crucible of another world war, came an American public obsessed with a driving desire for social security. This phenomenon resulted in two unique institutions: the Social Security act and the private pension fund. So much is history. What few people realize, however, is that the former is totally overshadowed by the latter in its dollar valuation, effect on the national economy, and growth potential. The responsibility for evaluating, interpreting and reporting the effect of such private pension funds is a challenge to the accountant‘s imagination and technical ability. (Matthews, 1960)

Nearly fifty years after the above statement, pension plans still challenge the accountant‘s ―imagination and technical ability.‖ Today, pension accounting is under renewed scrutiny. Under the push towards fair value accounting, the United Kingdom released FRS 17 in 2002, and in the US firms are now required to report the plan‘s financial status on their balance sheets. These standards have introduced new levels of volatility to earnings and asset values, causing considerable concern among constituents.

Thus, the debate has continued, and while it appears to be about technical accounting matters, its history, as illustrated herein, points to more than this. Following the suggestion that ―(an understanding of the) nature of the obligation itself (is essential) in order to evaluate the positions taken in the pension accounting debate‖ (Flegm, 1984, p. 32), this paper offers a detailed historical study of that pension obligation and accounting for it. Drawing upon archival materials from the inception of the first industrial pension plan in North America and ending with the development of the first

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two Accounting Research Bulletins on pension accounting in the 1950s, this paper develops a genealogy of the debate. Using Foucault‘s power-knowledge theorization, it attends to the discourses surrounding pension costs and pension accounting in the first half of the 20th century in the United States. That period is chosen because in it appear incidents that contributed to what we now understand are our options regarding pension accounting. The development of pension soundness, the import of actuarial science, and the switch in thought from employers‘ control over pensions to employers‘ ―obligation‖ for pensions, all appear during this time.

This study has two motivations, both influenced by the idea of ―accounting in action‖ and the call to examine accounting within its social and organizational context

(first put out by Anthony Hopwood and colleagues in the 1980s). The first is to demonstrate the social embededness of pension accounting given that much research related to pension accounting is grounded in economics. While these studies have highlighted salient elements of the pension accounting landscape, they also miss the important social and political features of pensions that this study purports to examine.

Economics based research has attempted to understand how investors use complex pension disclosures and whether they try to see through the complexity (Coronado and

Sharpe, 2003; Wiedman and Wier, 2004; Joss, 2006; Picconi, 2006; Hann et. al., 2007).

Research has also examined whether new standards have driven the closure of defined benefit plans (Munnell, et. al., 2006). Research going beyond the economic has been scarce: Klumpes (2001), Graham (2008, 2009) and Thomas and Williams (2009) have situated pension accounting within a broader framework. In this vein, the current study

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complements the economics based research, first by problematizing the complexity of pension accounting to examine the constitutive nature of accounting in producing disclosure requirements, and second by giving attention to the social and political embededness of accounting in pension strategy and decision making.

The second motivation is to highlight the influence of the actuarial profession on accounting, and reveal how accounting was shaped through the incorporation of actuarial knowledge. The actuarial profession is largely absent in the accounting literature, even though the accounting and actuarial professions owe much to each other‘s development in certain areas. Hopwood promoted work that would examine the ―roles in which accounting plays in shaping its own development‖ in part through the

―professionalization of knowledge‖ about accounting (Hopwood, 1983, 290). Kurunmäki

(2004), expanding on Abbott (1988), examined how the accounting profession absorbs knowledge from other professions through ―hybridization‖. The import of actuarial knowledge has had two important results: it has shaped accounting practice and has brought the complexity that has driven many of the disputes around accounting standards.

The current study thus addresses Hopwood‘s call to look at the professionalization of knowledge, but extends this to the development, acceptance and privileging of non- accounting knowledge that was influential to accounting practice.

This work is important for two reasons. First and foremost is the importance of industrial pensions in today‘s society. Industrial pension plans represent a collective economic powerhouse. Assets held in private pension plans account for more than 100% of GDP in each of Australia, Canada, Denmark, the Netherlands, Switzerland, the UK

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and the US (International Financial Services London, 2009). Private industrial plans have been intimately tied to, and even substituted for, national social security policies, and industrial plans have long been central in labour relations. Their role in society is not going away, since changing demographics paired with the move to new types of pension plans means that issues around their funding and sustainability will stay in the foreground for many years to come. Second is the vital role that accounting plays within this system.

Accounting and reporting requirements have influenced the design of pension plans themselves. Since their value can represent a large part of a firm‘s balance sheet, changes in accounting for pensions directly impact a firm‘s financial position, and have resulted in firms re-assessing the types of plans they prefer to sponsor. The current study contributes to our understanding of how accounting works to shape this system.

This paper proceeds in five parts. Part 1 comprises this Introduction. Part 2 presents the theoretical framing. Part 3 provides a short background on the introduction of industrial pension systems in North America. Part 4 examines the development of pension accounting with a focus on two critical junctures in the thinking of pensions and pension reporting. These are the development of actuarial science and the emergence of a discourse that claimed an employer‘s moral obligation to offer a pension plan. Part 5 provides an epilogue to take us to the present-day standards debates and Part 6 is a discussion and conclusion.

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2. Analytical and Theoretical Framework – A Genealogy of Pension Accounting

2.1 Accounting in Action

One has taken the value of these ―values‖ as given, as factual, as beyond all question; one has hitherto never doubted or hesitated in the slightest degree in supposing ―the good man‖ to be of greater value than ―the evil man‖, of greater value in the sense of furthering the advancement and prosperity of man in general (the future of man included). But what if the reverse were true? What if a symptom of regression were inherent in the ―good‖, likewise a danger, a seduction, a poison, a narcotic, through which the present was possibly living at the expense of the future? (Nietzsche, 2000, original 1887).

In a series of articles published in the 1980s, Hopwood and colleagues put out a call for studies of ―accounting in action‖, (Burchell, et. al, 1980; Hopwood, 1983;

Burchell, et. al, 1985; Hopwood, 1987). Several key ideas emerged out of their work.

First, they suggested that we conceive of accounting as being a social rather than purely technical phenomenon, and that we examine how ―the social‖ impacts technical practices, which in turn mobilize and change the social. In that sense, accounting ―actively shapes the perception of and salience attached to some of the very phenomena which are supposed to put pressures on it to change‖ (Hopwood, 1983, 290). Second, rather than model accounting and its environment as two separate constructs their work proposed that we examine a network of social relations, in which accounting both provides the conditions for existence of certain phenomena, and defines organizational boundaries, such that it is implicated in the construction of the contexts in which it operates. Related to this, the research introduced the idea of the ―accounting constellation‖ in which accounting is situated within the ―…particular field of relations which existed between

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certain institutions, economic and administrative processes, bodies of knowledge, systems of norms and measurements, and classification techniques,‖ (Burchell et. al.,

1985, p. 400). Finally, the studies proposed that we examine how accounting has changed, not by examining its path from where it began life as ―wrong‖ and evolved to what it was intended to be, but rather by looking at the specific processes by which it

―became what it was not‖ to begin with.

A popular approach to studying accounting in action are historical studies that have utilized the genealogical method based on the writings of Nietzsche and Foucault.

This approach attempts to create a ―history of the present‖ by ―cultivat(ing) the details and accidents that accompany every beginning‖ (Foucault, 1977, p.144). Cited as one of the most influential modes of writing within the new accounting histories (Napier, 2006, p. 460), genealogies present the unfolding of a non-linear diverse series of events that shaped some present-day phenomena:

We want historians to confirm our belief that the present rests upon profound intentions and immutable necessities. But the true historical sense confirms our existence among countless lost events, without a landmark or a point of reference (Foucault, 1977, p. 155).

Genealogical studies involve a careful examination of the details surrounding historical events and relations among a multitude of agents and institutions. They also pay attention to discourse, recognizing that certain ways of speaking and thinking can shape a particular process (Foucault, 2003). Thus, this method can reveal accounting in action since certain ways of thinking enabled and promoted particular calculations and techniques whilst making others less visible, thus shaping practices as they have

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developed (Miller and Napier, 1993). Furthermore, the genealogical approach reveals that where we are today was not inevitable, necessary nor self-evident (Miller and Napier,

1993, p. 633). Thus its aim is to:

…emphasize the historical contingency of contemporary practices, and to debunk the apparent permanence of the present. We need to think in terms of multiple and dispersed surfaces of emergence of disparate and often humble practices, rather than in terms of present accountings as those to which all preceding practices have necessarily and inexorably been headed. (Miller and Napier, 1993, p. 633)

Genealogical accounting histories have offered important insights into the processes by which accounting has been shaped by the social and also has shaped it, to show how accounting has continuously become what it was not. These have been valuable reflections on examining accounting change from a detailed perspective to show

―how‖ change has happened. For example, in Burchell, et. al 1985 we witnessed the intertwining of the social and the technical with the rise of the interest in value added accounting in the UK in the 1970s, in light of the observation that rather than reduce conflict and shed light, value added appeared to bring about confusion and doubt. Miller and O‘Leary‘s classic work showed how the notion of ―efficiency‖ was circulated both in society and the organization at identical times (Miller and O‘Leary 1987). A set of knowledges and discourse about what could be considered efficient then shaped the development of standard costing and budgeting. Loft (1986) performed a genealogy of cost accounting in the UK to reveal the link between the development of cost accounting through knowledge that was emerging during a very specific time frame in the UK, and

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the professionalization of the management accounting profession. These papers have influenced a score of other histories over the last three decades (see, for example, among others: Hoskin and Macve, 1986; Bhimani, 1993; Miller and Napier, 1993; Everett, et. al.

2005; Graham, 2009).

This method stands in contrast to a more traditional approach to accounting history which views accounting as being on an evolutionary path to ever more ―correct‖ accountings. Using this perspective, pension accounting‘s history has been identified as

―predictable, logical, and based on easy to comprehend compromises between various competing interests‖ (Carpenter and Mahoney, 2006). It also presents the opportunity for the researcher to offer critique of the present day practices, since they are not inevitable

(Macintosh, 2009). The present study, however, questions the need to seek a logical history. Instead it asks how did knowledge about pensions change in order to permit pension accounting to emerge and become what it had not been before, and this implies a history with non-logical developments that influenced today‘s practices. In sum, rather than examine this past as a set of rational and logical decisions on a path towards a truth in pension costs, an alternative view of this history is to see the ―present as, in part, a construction of past human choices that may be altered in the future‖ (Young and Mouck,

1996, p. 127).

2.2 Foucault’s Power-Knowledge

To frame the relations that shaped accounting over this historical period, the study draws upon the ideas of power-knowledge developed by Foucault. Doing so permits us to see how power and knowledge acted upon one another to create the possibilities for

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accounting to change. In The History of Sexuality Foucault traced a history of attitudes towards sex and the relation between power and knowledge about sexual behaviours. In that work, Foucault proposed that we consider that ―things‖ or ―sites of interest‖ became worth studying only because relations of power had deemed them as such. Conversely, those relations of power were able to deem these as sites of interest because knowledge had been created that made their study possible (Foucault 1978, 98). Thus, power and knowledge co-exist to have specific interlocking influences on the emergence of certain topics.

This theorization has two specific methodological implications for how we can study a setting. First, we must be precise in the questions we ask concerning power.

Power holds a particular meaning here: since power does not exist independently as a commodity, agents cannot possess it, but they are able to create it through their actions.

As Townley (1993) put it, if power is not a commodity, then:

(Q)uestions such as ‗who has power?‘ or ‗where, or in what, does power reside?‘ are changed to what Foucault termed the ‗how‘ of power: what are those practices, techniques, and procedures that give it effect? (Townley 1993, 523)

Second, the exercise of power transforms knowledge by changing what can be said about it, and changing what counts as knowledge. Foucault described the idea as follows:

In a science like medicine, for example, up to the end of the eighteenth century one has a certain type of discourse whose gradual transformation, within a period of twenty- five or thirty years, broke not only with the ―true‖ propositions which it had hitherto been possible to

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formulate, but also, more profoundly, with the ways of speaking and seeing, the whole ensemble of practices which served as supports for medical knowledge. (...) My aim was ... to pose the question, ―How is it that at certain moments and in certain orders of knowledge, there are these sudden take-offs, these hastenings of evolution, these transformations which fail to correspond to the calm, continuist image that is normally accredited? (Foucault, 1980, 112)

Therefore, we want to study the moments in time when this way of thinking changed, for in those moments we hope to observe how power was exercised, thus bringing about change. In sum, we study both the ―how‖ of power, in terms of how it was enacted, and also the results of those actions, in terms of knowledge transformation. This study, then, asks how power was exercised and what were the effects of its exercise on the development of pension accounting.

The chosen method and theoretical perspective will enable this paper to contribute by bringing pension accounting out of the technical and revealing the social embededness of both accounting standards and also pension accounting knowledge. Specifically, the academic literature continues to study the ―economics of pensions‖ without recognizing the degree to which pensions, including the economics of funding and accounting for them, are socially embedded. This causes us to take the complexity of pension reporting for granted, and now we grapple with it when it was not inevitable. Research that has examined the value relevance of pension accounting data, and investors use of these disclosures, has found that the information is so complex that investors may be unable to

―see through‖ it, and has claimed that management can fairly easily manipulate it due to its complexity. Analysts want transparent, relevant information and yet the disclosures in

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place are complex, untransparent and of questionable relevance to investors. Continuing to study pension accounting far removed from the social and political influences on its development will risk continuing to ignore factors that weigh heavily in what ―gets disclosed‖.

Secondly, economic research examines accounting‘s influence on pension strategy using models that ignore non-economic variables. What we know from these studies is that accounting and reporting for pensions may (or may not) influence the closure of, or changes in, pension plans. Yet these fail to ask how exactly does accounting ―work‖ to either become more important or less important in design decisions? In which types of firms and industries is accounting given more or less importance in the pension decision process? Which organizational agents take up accounting in what ways? Finally, how do these translate into pension plan system features? These are the self-constitutive roles that accounting plays that are not easily accessible through the logic of economics. Continuing to isolate purely economic variables will provide only a partial picture of accounting‘s role in driving or participating in the design of plans.

Third, we continue to study pension accounting in strict isolation from its influences, specifically the influence of actuarial techniques. Little attention is paid to the different notions of cost, and whether these are ―accounting‖ or ―actuarial‖ notions.

Similarly, we ignore how actuarial techniques are imported into accounting, which may shape how they are used and taken up by accountants, investors and other decision makers. We develop standards that draw upon actuarial knowledge, and the influence of

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actuarial practices on pensions is well known, yet academic research often treats these two as distinct. This paper aims specifically to show how the knowledges of these two professions merged, as a precursor to understanding more about how accounting has become what it was not.

2.3 Method and Data

This paper develops its thesis through a genealogy of the development of North

American pension accounting standards for industrial plans. The study begins in the latter half of the 19th century when the actuarial profession emerged in North America. It ends just prior to the publication of Opinion No. 8 in 1966, released by the Accounting

Principles Board to clarify its view on pension accounting. This study argues that during this period two shifts in thought occurred. First, actuarial science developed tools and knowledge about studying pension costs with reference to unpredictable future events.

Second, society shifted from thinking about pensions as a gift within employers‘ control to an obligation placed on their shoulders. These two ideas worked together to create conditions in which accounting emerged as it did. By the end of this period, the belief that employers owed some formal obligation and should account for it based on principles grounded in actuarial science was firmly in place in the minds of the majority, and accounting concepts have continued to rely on these.

In this study it has been important to move among the different agent groups that were involved in the development of the thinking about pensions and pension accounting.

Doing so required examination of both original source material as well as secondary sources. Secondary sources from that era were particularly useful in understanding the

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ongoing discourse that so influenced both the view of the actuarial profession and its knowledge, as well as the ideas about an employer‘s obligation to continue a pension plan. The ―conversation‖ between the actuarial and accounting professions was examined through policy and consultation documents on their roles in this new pension world both within each profession and outside the boundaries of the professions in the wider public domain.

The study has drawn upon a large volume of archival material maintained by the

Society of Actuaries (SOA). This body was formed in 1949 from the merger of the

Actuarial Society of America with the (newer) American Institute of Actuaries. The SOA represents a membership of 20,000 in the United States and Canada. Its library maintains a collection of SOA publications, reports, studies and yearbooks, as well as some 1,600 books, special actuarial publications and a wide range of domestic and foreign publications. It maintains an electronic library of archival research materials including the

Transactions of the Society of Actuaries, a record of meetings, presentations, discussions and educational information. This electronic resource provided the materials for the current study.

The accounting profession‘s academic, professional and educational materials are also included. These were obtained through various electronic association and library sources. One significant source was the University of Mississippi‘s Digital Accounting

Collection which offered a vast archive of historical documents, including accounting records and books, and company and association pamphlets and communications. These were keyword searched using the Digital Accounting Collection searchable database.

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Government policies were examined via original legislation, policy documents and secondary historical information. The SEC is represented through its archival material including addresses to the accounting profession, speeches and public pronouncements.

These are maintained back to 1932 within the extensive ―Commission Speeches and

Public Statements‖ archive which is publicly accessible in digital format.

Where available, digital materials were accessed via the searchable function for the relevant archive. However, in some cases data was hand-sorted and searched by date if no adequate search function was present. Contemporaneous media articles and academic articles were examined via a search of databases covering periodicals

(academic and non-academic) back to the mid-1800s. Sources for the wider public debate on pension plans, financial failures, labour‘s view and broader public views include media coverage of these issues, as well as commentary by academics and interest groups.

3. The Institution of Industrial Pension Systems in the United States

The personal pension is an ancient institution. The pension system is distinctly modern. (Conant, 1922, p. 53)

This section briefly outlines the emergence of the industrial pension system.24

Pension benefits date back to the Roman Empire when pensions were given as gifts for service in the military, literature, and the arts at the discretion of the sovereign. In the industrial era, some employers considered the pension as a form of philanthropy when times were good. Over time, pension plans became formalized, and benefits were held

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out to workers as inducement to, or reward for, continued service (Latimer, 1932;

Shapiro, 1985; Sass, 1997).

The emergence of the ―modern‖ system of industrial pensions is cited in conjunction with the move from a rural to urban industrial society at the start of the 20th century. When workers had been rural, their financial needs as they aged could be met through family and community networks and their work could be adjusted to adapt to their changing abilities. But when urbanization and industrialization hit, they were unable to depend on these to meet financial resources that diminished as they aged (Chandar &

Miranti, 2007; Sass, 1997). From about 1900 to 1920, the typical plan offered defined benefits, with no vesting of benefits, and was easily terminated by the employer at its discretion.25 Workers benefited little from this style of plan since they rarely stayed with a single employer until retirement age. In fact, Labour‘s preference was to abolish the defined benefit system and substitute either a national social-security plan, or employee savings plans in which workers received their contributions in the form of an upfront cash payment (Stone, 1984).

Regardless of workers‘ views, companies continued to establish defined benefit plans through the first three decades of the 20th century. Older workers, by this time, had become challenges to increasingly industrialized production.

24 For an in depth review of the subject including more detail on the role of unions, the rise of Social Security and the detailed statistics related to the rise of pension provision, see Conant, 1922; Latimer, 1932; Sass, 1997. 25 Benefits are vested when the employee becomes entitled to receive them even after leaving that particular employer.

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The problem facing the aged today is largely the creation of the modern industry with its components of specialization, speed, and strain. (Epstein, 1972, orig. 1922, cited in Weiler, 1989, p. 65)

Pension plans were a tool that could increase efficiency of the overall workforce by moving older workers out the door (Stone, 1984, p. 23). Compulsory plans dominated in industries that were most amenable to the efficiency movement, suggesting that business management philosophy influenced the design and establishment of plans.

Scientific management had brought engineering controls to the shop floor and concerns arose that workers over age forty-five were not suited to tasks which had become narrowly defined and precisely interconnected. Thus, the pension could ―eliminate the inefficient‖ (Graebner, 1980, quoted in Sass, 1997, p. 52).

The 1940s saw changes in labour‘s view. In 1945 the War Labour Board limited the amount of cash compensation that companies could pay workers, encouraging non- wage compensation such as pensions. Unions focused on pensions as their means to negotiate wage increases. Additionally, the decision in Inland Steel v. United States declared pensions to be within the scope of collective bargaining for the first time, moving pensions to the top of the Labour agenda (Sass, 1997).

In summary, since their inception, reasons for pension plan development have included altruism, improvement of relations with labour, and efficiency. Even though by

1920 ―astute business people knew that pensions reduced neither strikes nor turnover‖

(Sass, 1997, p. 54), the system continued as it met certain business needs. By the 1920s, pensions had become a part of the flow of labour, yet their dominance within large

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companies, and weakness in actually paying out benefits, made them an inadequate solution to the issue of old age income needs. Their continued existence showed that they nonetheless by that time ―served the needs of large American enterprise‖ (Sass, 1997).

3.1 Accounting for Pensions – Early Ideas

Early on, employers accounted for pensions on a cash basis, expensing benefit payments as they were incurred. When pensions were viewed and structured as gratuities, this method made some sense since there was no commitment beyond the immediate cash outflow. Also, employers did not yet associate pensions with the cost of labour, so the matching principle which would tie employee service to pension payments had not transpired. As time wore on firms realised that the pay-as-you-go method could result in significant increases in cash outflows in certain years. To deal with this, many created a reserve against surplus to which they charged pension payments, basing this on the theory that pension costs were not operating costs to the business but were distributions of a portion of its profit.

This changed as two accounting theories about pension costs emerged. The first, the ―deferred wages theory‖ presented pensions as wages that workers only agreed to defer under the belief that they would receive them at retirement. Thus, the cost should be expensed in the period in which the worker performed services (Conant, 1922).

The competing theory (a theory of ―human depreciation‖) characterized pensions as insurance (Rand, 1911).This view claimed that pensions were an outpost of scientific management, created on the assumption that they would increase profitability. Thus,

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employers received the benefit when the worker was retired, so the expense should be incurred at that time.

In so far as such a payment is for insurance against that waste and inefficiency in his establishment which would result from retaining superannuated employees and for protection against that discontent which would result from discharging the superannuated without providing for them financially, it is part of the business expense. (Brandeis, 1914, p. 67-69, cited in Stone, 1984, p. 25)

Yet, commentators and employers alike realized that cash outflows were escalating no matter which theory was adopted. Financial difficulties experienced by some firms in this era impacted their pension plans directly and plan terminations were highly publicized. This focused attention on the idea of the ―cost‖ of pensions, providing the space in which the emerging actuarial science could intervene.

4. Necessary ingredients for pension accounting: the rise of actuarial science and a moral obligation

4.1 The entry of science: Privileging actuarial knowledge

What went wrong? Why did accounting standards established in the 1960s not stand up? Basically it was because accountants didn‘t know enough about the work of the actuary. They didn‘t understand how much impact the choice of actuarial cost methods and actuarial assumptions could have on measures of pension obligations and pension expense. … Clearly, if accounting standards are to be improved, the accountants must first understand what actuaries do and then work with them to select a basis of calculation that makes sense for financial reporting purposes (Skinner 1980, 11).

The above noted quotation hints at the idea that actuaries possess a particular form of knowledge which accountants must understand in order to ―get the accounting right.‖ It implies

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that standards setters who fail to grasp what it is that actuaries do will continue to develop standards that do not work. It also points to a need to study the embededness of accounting within the social influences that impacted it, in this case, the growth of the actuarial profession and its merging with accounting knowledge. With a view to examining where this notion of privileging actuarial science within accounting came from, this section presents a brief outline of the emergence of actuarial science in North America.

There is modest debate around just when actuaries began to practice in North

America, but by 1850 eleven actuaries were practicing at insurance companies in New

York and Philadelphia as ―individual, inexperienced mathematicians poring over books and figures in search of guidelines to discharge unfamiliar responsibilities.‖ Although the

Institute of Actuaries in the UK formed in 1848, it would take another forty years for the profession to organize in North America. The relatively informal beginnings of the society‘s formation are recounted as follows:

In the latter part of the year 1888 an old friend of Sheppard Homans called on him and urged that circumstances had changed so as to favour the formation of such a society as we desired, and it was decided to make the effort early in the following year. In

February, 1889, Mr. St. John of Hartford, in a call at my office, said: ―Why can we not have an actuarial society?‖ and Mr. Mcclintock stated that Mr. Hall had asked him the same question about that time, so with five of the oldest actuaries thus favourable it was clear that the time for action had arrived‖ (Moorhead 1989, 44).

They sent letters to thirty nine actuaries, with thirty four respondents in favour of the idea, after which a competition was held to choose a mission statement for the group.

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Their interest in mathematics and science as tools to find truths is illustrated by the top three choices:

1. The work of science is to substitute facts for appearances, and demonstrations for impressions. 2. Truth, our aim; the time to come, our care. 3. By calculation you will find the truth.

(Moorhead 1989, 55)

The mission statement named how the profession would approach knowledge- creation. In 1918, the Society‘s President Arthur Hunter noted that the Society had passed through three phases, first that of a ―private club‖, then a ―scientific association‖ and finally a ―scientific and public society, seeing clearly its duty to educate actuaries and also its obligations to the insurance world, the community and the government‖

(Moorhead 1989, 108). As this idea took hold, the profession began to see venues in which it could apply its mathematical techniques to unveil ―truths.‖ Society President

William Hutcheson in 1922 proposed that they aim to expose the statistical errors and fallacies encountered in daily life, and the American Institute encouraged actuaries to investigate whether their communities were ―ignorantly obligating future generations to exorbitant costs of police and fire department pensions‖ (Moorhead 1989, 108).

This attitude could not exist without the creation of the knowledge to support it, and actuaries privileged knowledge above all else. The profession placed considerable emphasis on examinations, with a demanding process taking six years on average to progress to the Fellowship designation. The breadth of subject matter made this a daunting process, as illustrated by the 1908 Fellowship curriculum:

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Table II.1 - 1908 Fellowship Examination Subjects Part A Part B

Construction and Graduation of Mortality Expense Assessment

Tables

Advanced Life Contingencies Surplus Distribution

Gross Premiums Policy Changes and Surrenders

Valuation of life Company Liabilities and Life Insurance Bookkeeping

Assets

Substandard Business Annual Statements

Pension Funds Investments

Banking and Finance

Life Insurance Laws

Source: Moorhead, 1989.

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Senior members of the profession held a mystique that demanded a particular respect. ―Youngsters treated the actuarial ‗greats‘ with respect approaching awe. They sat at the front, we at the back. When they had said their pieces, unless we were called on to speak we usually took it for granted that that was all there was to be said‖ (Beatty 1977, cited in Moorhead, 1989, 107).

In sum, like other professions, actuaries redeployed from a loosely-connected group to a more cohesive entity focused on knowledge creation. A daunting curriculum ensured that they could not easily be challenged by non-actuaries. They took this a step further by striving to use that knowledge for public good. Eventually, as will be demonstrated in the next section, their expertise became fully accepted within the field of pensions and pension accounting.

In the United States, actuaries became involved in pension plan provision first in public sector plans when, in 1914, the Society responded to a request of the New York

City Pension Commission for advisors. At that point, pensions were still a novel area for actuaries, although some sensed a need for involvement, noting that ―… most pension schemes are commenced without actuarial advice and it is only after a number of years that the managers of the schemes begin to scent trouble ahead‖ (Dwight A. Walker, 1915, in Moorhead, 1989, p. 83-84).

In contrast to a linear path in which actuaries expanded their influence in a methodical way, the story of their success in the pension field can be attributed in part to historical ―accidents‖ which provided a venue for actuarial knowledge to be deemed important. One such event was the enactment of taxation laws aimed at tax avoidance.

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Early on, companies could deduct their pension contributions but since the Revenue Act failed to specify the type of plan that would qualify for a deduction, companies could theoretically establish a plan for only certain individuals such as senior executives.

Companies did so, sheltering their contributions while providing pension coverage for a select few. When President Roosevelt‘s administration investigated tax loopholes, motivated by falling taxation receipts, this practice came under fire. In his letter to

Congress, Roosevelt stated plainly a view of taxation for pensions:

The revenue acts have sought to encourage pension trusts for aged employees by providing corporations with a special deduction on account of contributions thereto, and exempting the trust itself from tax. Recently this exemption had been twisted into a means of tax avoidance by the creation of pension trusts which include as beneficiaries only small groups of officers and directors who are in the high income brackets. In this fashion high-salaried officers seek to provide themselves with generous retiring allowances, while at the same time the corporation claims a deduction therefor, in the hope that the fund may accumulate income free from tax. (F. D. Roosevelt, cited in Woolley & Peters, 1937)

Amendments to the 1942 Revenue Act thus required companies to cease covering only selected groups of employees. However, these amendments also codified, for the first time, the actuarial profession‘s involvement in accounting. The Act required the

―normal cost‖, an actuarial term to indicate the current year‘s accrued obligation, to be funded in that year (United States Revenue Act, 1942). This had several effects. First, it eliminated cash based pay-as-you-go funding for those employers wanting to benefit from tax deductibility. Second, it institutionalized actuarial knowledge. Third, it constrained employers‘ ability to structure and design plans. Foucault noted that power is

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neither negative nor unilateral but can be productive and positive, and in this light we can observe that while these actions bled power from employers, they positively affected constituents such as workers, and actuaries who were becoming experts in the field.

A second historical event that contributed to the privileging of actuarial principles was the financial failure of certain pension plans, which was spectacularly published in the popular press. Failures fed a public consciousness that something should be ―done‖ about pension costs. Understanding that there was a problem and seeking a solution to it implied that a certain knowledge could be had about it, and in this case it was actuarial science that both revealed and offered solutions to the problem.

Financial failures were influential in two other ways, both of which illustrate how the social impacted on the technical, contributing to how accounting was changing and becoming what it had not been previously. First, they introduced the idea that firms should be embarrassed over their inability to provide the pensions that had been promised. This contrasts with earlier ideas deeming it socially acceptable for a company to terminate a plan or cease to pay promised benefits. Second, failures placed pensions in the public eye via the media attention given to them, bringing the public and workers into the field of discourse. These two factors helped make it possible that wider calls for reform would be answered by a ―disinterested community of scientific pension experts‖ who developed the concepts of pension soundness (Sass, 1997, p. 62). Pension soundness required three conditions:

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1. Pension expense should be matched to the receipt of value. The value of the future

annuity should be amortized over the years of active work, with this determined under

the direction of an actuary. As one reformer posed:

If a company produced woolens for thirty years, closed its plant, and purchased a button shop,…could proper accounting charge a woolen worker‘s pension against the new button operation?

2. The accrued expense must be funded by assets transferred to a secure and

independent fiduciary.

3. Participants should have vesting rights, or the ability to withdraw cash or pension,

after a reasonable period of time.

Here, accounting is seen in a self-constitutive role, shaping its own development through the acquiring and privileging of actuarial ideas that were themselves a product of a growing social consciousness about pension failures. Thus, coming out of the reform movement associated with these failures were actuarial ideas that became intimately tied to accounting‘s development. Indeed, actuarial involvement was on the rise: from 1925 to

1929 the use of actuaries for plan valuation rose from 17 percent to 55 percent in the US and Canada (Latimer, 1932).

Prior to actuaries getting involved, pensions could still be viewed as a tool for corporate control of labour. As complexity of funding emerged, pensions became subject to a new industry of providers who helped manage the plans and determine their soundness. Ambitions of managing pensions exclusively within the firm withered. The introduction of scientific methods changed the unfettered authority that companies had

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over their plans and shifted the organizational boundary. Knowledge was produced outside the firm‘s boundary by actuaries and reform advocates. That translated into a power over what could be known about pensions, and about what was the ―correct‖ knowledge about costs. Power thus existed outside the organizational boundary, and later sections will show how employers and accountants came to move power out of the organizational domain in order to incorporate and privilege this knowledge. In some ways this was not surprising since the pension system was moving beyond the organizational realm and was becoming firmly grounded in the social, and by then it was recognized that ―(t)he 1920s saw the first transformation of the pension, in hindsight inevitable, from a management program to a complex social institution‖ (Sass, 1997, p.

87).

4.2 Imposing a moral and economic obligation on employers

In spite of the increasingly scientific approach to pensions, employers showed little interest in investigating new ways of accounting for pensions. Stone notes the conflict between this lack of interest and the increased use of scientific management principles to increase efficiencies in other areas. This study‘s thesis is that employers would not be interested in scientifically accounting for pensions until they had a specific obligation to pay them in the future. Thus, critical in the development of pension accounting principles was the shift from thinking about pensions as voluntary to obligatory. When the pension arrangement became a long-term venture that was non-

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revocable, actuarial science could play a role in measuring its current value, which would give accounting the substance of what to ―account‖ for.

This section examines how that obligation developed enough for accounting to intervene. 26 It also demonstrates how pension accounting became what it was not at the start of the century. This happened via a discourse that encircled employers, drawing on notions of ethics, labour relations and moral obligations. First, prior to this shift, employers designed and administered pension programmes on their own terms and had full control of them. Commentators studied employers‘ motivations for establishing pension plans, offering the following:

1. A desire to provide for the old age of dependent, superannuated employees.

2. A desire to reward employees who have rendered unusually long service.

3. A desire to increase efficiency, first, by the elimination of superannuated or

incapacitated workers on a human basis and, second, by stimulating the good will and

effort of the active force.

4. A desire to hold the worker to the job, thereby reducing labour turnover.

5. A desire to exercise a disciplinary control over workers in respect to strikes and in

other ways.

26 Accounting has not always needed the existence of a formal legal obligation to require disclosure. For example, FASB Concept Statement No. 6 Elements of Financial Statements, includes a lengthy discussion of what constitutes a liability. Paragraph 40 deals with the notion of legal, constructive and equitable obligations. Ethical obligations are those stemming from ―ethical or moral constraints rather than from rules of common or statute law.‖ These notions echo the long standing tradition of the courts of equity, which ―dispensed an extraordinary justice remedying the defects of the common law on grounds of conscience and natural justice,‖ and were based on maxims of equity such as ―Equity looks to intent rather than form.‖

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(Conant, 1922)

Additionally, the institutional environment offered no legislation to counter employer control. As noted by Latimer:

(The) trend of the law so far has been to say to industry that it make its own law for pensions. The court will take the pension plan as the statute in each case and decide in accordance with it. (Latimer 1932, 706)

In reference to the power relations at play we can observe two items. First, in each of the above noted motivations, industrial plan sponsors exercised power in relation to workers and to other potential providers of superannuated income (social security, for example). They did so by developing and controlling the plans. Second, commentators who studied employers‘ motivations created a discourse which privileged the employers‘ relative position. Control meant that employers could keep the plans voluntary, which had important implications for accounting. Pension accounting was given little attention except by a handful of academics and as one observer noted, employer indifference was due to the fact that pension plans were non-contractual:

(M)any executives of important businesses … have told me that since the pension was a voluntary matter, determined in amount and terms of the date of grant, future pension payments did not constitute an obligation that could properly be considered a balance-sheet item. (Kimball 1929, cited in Stone, 1984, 27)

It wasn‘t expected that employers would unilaterally take on the notion of owing a long term obligation to provide pension benefits, and no particular source of influence decreed that they do so. But by the middle of the century such a commitment was accepted and accounting would pick up on it. The significance of this was enormous.

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Considering the impact of owing a significant financial obligation, the movement toward placing this on the head of employers is a critical yet overlooked shift in thought. The situation is summed up by Philip Friest‘s comments:

(I)n the early days of pensions, the informal arrangements for payments to retired employees resulting in pay-as-you- go costs may well have been correct. There was no requirement, legally or morally, and therefore no cost or liability during the working years of the employee. After retirement, he was transferred to a pension payroll and the cost of his pension was incurred as payments were made. The balance sheet usually failed to reveal any liability for the payments thus assumed. This may not have been too serious when there were only one or two employees on pension. Still, the liability should have been recorded, for at that point there was a moral, even if not legal, obligation, to continue payments, at least during reasonably prosperous times.

It would seem almost impossible to come to the conclusion that such a system would be at all acceptable today. Pensions are now a part of the employment framework and to record the payments made to the retired worker as cost when made, can hardly be construed as a proper matching of revenues and expenses. Pensions are a reward for services rendered and the cost of such pensions must be charged against the period in which the services are performed. The pay as-you-go system appears to find little favour among the accountants today and is not likely to be of importance in the accounting for pension plans. (Friest 1962, 20)

As early as 1912 social reformers observed that employers should be accountable to workers who had become unable to work in the new industrialized society. Their

―human depreciation‖ theory declared that working took a toll on the human body and should be compensated for by those employers who reaped its benefits. The idea received

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influential endorsement some thirty years later when in 1949 the steel industry‘s labour dispute fact finding board wrote in its findings:

(W)e think that all industry, in the absence of adequate government programs, owes an obligation to workers to provide for maintenance of the human body in the form of medical and similar benefits and fully depreciate in the form of old-age retirement – in the same way as it does now for plant and machinery.

The steel industries have, with some exceptions, overlooked the fact that the machines and plant on which the industry has prospered, and on which it must depend in the future, are not all made of metal or brick and mortar. They are also made of flesh and blood. And the human machines, like the inanimate machines, have a definite rate of depreciation. (Steel Industry Board, 1949, cited in McGill, et. al., 2004, 16)

This view took hold in the 1920s and following decades. The advent of government sponsored Social Security took some of the force away from this argument since it viewed the state as an alternative provider. Regardless, the idea that employers were a natural source for retirement income was in circulation.

The taxation laws that had been enacted to curb evasion also provided a jolt to the system in thinking about the permanence of pension obligations. As of 1928 companies could deduct amounts over and above current pension liability (i.e. past service obligations). However, the legislation created a loophole since it was silent on whether plans to which this applied be ―permanent‖, and not subject to closure at the whim of the company. Therefore, employers could contribute during better times, generating large deductions. During downturns they could close the plan and recapture the sheltered earnings. For a decade many did just that.

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The Revenue Act of 1938 countered this by requiring that plans be bona fide and for the exclusive benefit of employees. A company could terminate a plan only for

―business necessity‖ (Munnell 1982, 31-32). This condition, combined with the government‘s ability to confirm or deny tax relief, weakened employer control. It directly limited the options for employers. Indirectly, it fed into the blossoming attitude that employers should consider the pension plan a long term obligation, as illustrated by the following:

The corporate pension plan is a long-range project. An important implication is that the corporation intends, in the long run, to maintain the plan on an actuarially sound basis such that benefits are paid as they become due. The Treasury Department, in qualifying a pension trust for tax- exempt status, stipulates that the trust must be irrevocable and that it must be established for the sole benefit of employees. (Cramer 1965, 611)

Reputation in labour relations also played a role in bringing about thoughts of an obligation. The financial mishaps such as the Packers plan failure resulted in embarrassment which contributed to certain views about a company‘s labour management.

The trends of public opinion and actual corporate practice seem to be in the direction of recognizing an obligation on the part of employers to reward their employees for long and continuous service; actual payments of pensions and the establishment of pension plans point that way. Where (formal) plans have not been established, and it has nevertheless been a long established practice to grant pensions, the results have in some cases caused financial embarrassment (when numbers of employees have reached retirement age under informal plans) where the corporations have failed to provide adequate reserves and related pension funds. (Stempf 1943, 521)

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A decade later, similar ideas:

Whether there is a legal liability or not, a steadily advancing moral consciousness of the need for continuity of pension plans prevents the lawyer from placing too much reliance upon the lack of strict legal liability. Particularly with the need for presenting accurate information to creditors, stockholders, prospective investors and employees, the absence of technical legal liability on the company may prove a slender reed on which to rely. The moral responsibility to employees – indeed frequently the practical necessity of continuing a pension plan as a matter of labour-management relations – cannot be disregarded. (Cohen, 1953, p. 60)

The American Institute of Accountants agreed, suggesting that management was essentially forced to continue a plan indefinitely due to ―moral suasion and pressures from well-organized labour unions.‖ Employers‘ actions even implicated them. It was suggested that engagement of actuaries to calculate methods of accumulating funds over the work life of employees was ―prima facie evidence of the acceptance of the permanence‖ of the plans (Baker, 1964, p. 58).

The embededness of pension accounting in the social, and the specific processes by which it changed, are visible here. Despite its still technically voluntary nature, the pension obligation was now portrayed as a labour cost that management could not avoid.

The idea to conceptualize it as such was external to the firm. And accounting was now being called upon to recognize these factors in a firm‘s financial statements. Thus, the growth of a consciousness of some sort of moral obligation translated into an economic obligation so that accounting was able to intervene in the process, and actuarial methodology would ―reveal‖ the liability.

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4.3 Reporting for pensions – power relations and the move to accrual accounting

The newly created actuarial techniques combined with the idea that a pension is a long term entity requiring a present day valuation, enabled accounting to play a part.

Accounting had been struggling with ―what‖ to account for and how to account for it during the rise of these two ideas about pensions. This section reveals some of the political and practical struggles in its development. It also looks specifically at how accounting is constituted from within political and social settings.

Early formal pension accounting policy was enmeshed in a broader debate over moving accounting towards standards of comparability versus retaining diversity in methods. A brief account of the formation of the groups that would release the first pension accounting policy documents is provided here. In 1930, in the wake of publications alleging misleading financial reporting practices, the New York Stock

Exchange proposed that it and the American Institute of Accountants (AIA) work together to improve corporate financial reporting. They proposed that firms could use a variety of accounting methods so long as they did so consistently and disclosed what they were doing.

The Securities and Exchange Commission (SEC) took a different view. Its chief accountant, Carman Blough, urged the accounting profession to narrow the diversity in accounting practices, and if the accountants would not do so, the SEC would exercise its power to establish accounting principles. Between 1934 and 1938 the SEC and the accounting profession were at odds. Accountants feared the potential for ―dreaded

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uniformity in accounting principles‖ while the Commission voiced its concerns over what it saw as poor quality reporting.

The struggle culminated in the 1938 Accounting Series Release No. 4 which permitted filing of financial statements based on accounting principles for which there was ―substantial authoritative support‖ within the profession (Sommer Jr. 1974). The twenty-one member Committee on Accounting Procedure (CAP) was created to be that authority. The next twenty years were punctuated by the SEC‘s insistence on reducing areas of differences, and the CAP‘s attempts to meet this demand (Flegm 1984, 32; King

1950).

Unfortunately for the CAP, member disagreements got in the way of its efforts. A number of the fifty-one Accounting Research Bulletins it published included dissents that

―seemed to threaten further progress, (since) not a few of the dissenters and qualified assenters were representatives of the largest public accounting firms‖ (Zeff 1984, 458).

Firms took sides over philosophy about the role of the CAP in narrowing the range of acceptable accounting methods. Arthur Andersen & Co. urged comparability through usage of similar accounting methods; while Price Waterhouse & Co. and Haskins & Sells believed that letting firms adopt methods best suited to their individual business circumstances would achieve comparability (Zeff 2005).

Pension accounting found itself caught up in this. The push to accrual accounting for pensions was part of the broader debate about comparability, since the peculiarities of pension financing when combined with cash accounting was resulting in dramatic year over year differences in financial results, reducing comparability. Aside from this issue,

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firms were not disclosing the methods they were using to report on pensions. The first detailed survey of the disclosure practices related to company pensions, found that the majority of firms were still using the cash basis.

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Table II.2 - Accounting and disclosure practices of pension plans 1952 Method adequately explained?

Yes No Total Per cent

Cash 77 36 113 66

Cash, except for 11 7 18 10 amortization of past service costs

88 43 131 76

Accrual 35 6 41 24

Total 123 49 172 100

Source (Ogden 1952)

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The survey‘s author critiqued both the inadequate disclosures and the widespread use of cash accounting.

The ―cash-basis‖ is clearly one of convenience. (It) might have been acceptable accounting-wise in the past when plans were regarded as being terminable at will; the company might then have contended that its only costs were those paid in cash because it could theoretically discontinue the plan at any time and not be obligated for any costs beyond those actually paid. … (I)s it realistic to believe that they can or will be discontinued by any going concern? (Ogden, 1952, 47)

Ogden speculated that the failure to adopt accrual accounting methods was motivated by ―expediency, by reluctance to cope with uncertainties, or by failure to recognize that pensions are a permanent part of our economy‖ (Ogden, 1952, 47).

Ogden‘s words revealed the new way of thinking in which employers had little input into whether they continued a plan. Nor could they ignore the knowledge that had been created about long term obligations and the effects of that on cost considerations.

Yet, the majority continued to use cash accounting. Our understanding of this has to involve coming to terms with the difficulties in moving from cash to accrual based accounting. Chandar and Miranti (2007) described in detail the efforts required to transition from cash to accrual based accounting at the Bell System. Bell moved from cash to accrual accounting for pensions in 1927, placing the company as an early adopter of accrual accounting. Several circumstances contributed to this. First, the company is believed to be among the first to employ an in-house actuary. Second, actuarial science was accepted at Bell in part because of its ―pioneering use of this knowledge for solving engineering problems.‖

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In this environment the conditions emerged for the thinking about pensions from an actuarial perspective. The company created a statistical division that housed the accounting department. The division added areas devoted to financial and economic statistics and mathematical studies. In this division, accounting and actuarial science interacted and accounting began to absorb actuarial ideas. In 1924, the division began to study the feasibility of shifting to accrual accounting. It struck a committee composed of the corporate comptroller, corporate attorney and two statisticians. They believed that the accrual based system would require new knowledge in how to collect, analyse and report data for its 250,000 employees. Additionally, the system would bring immediate financial pain, requiring an appropriation of one third of company surplus and reduction of operating subsidiaries‘ equity from US $82m to $12m. They thus determined that a full ten-year transition period would be needed. Regardless, the firm‘s comptroller recommended the move to a full accrual basis since he believed that the cash based system understated ―true‖ liabilities.

Practically, the internal accounting and recordkeeping requirements for managing a pension plan on an accrual basis were also complex. For example, the difficulties experienced in setting up a pension plan for a 22,000 employee company are illustrated below.

From the actuary…we learned of the various records that must be maintained. (...) It was found that 33 forms would be required, in addition to the interoffice requirements as to data on acquisitions, separations, leaves of absence, payroll listings, and in addition also to the accounting records to be maintained. (Stanford 1950, 862)

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The plan stipulated that past service credits were to be based upon average wages earned during the calendar years 1942 through 1946. Unfortunately there was no mechanical means by which these wages could be accumulated conveniently and quickly without first key-punching the information. Therefore, it was decided to prepare it manually. This imposed a tremendous volume of work to be accomplished in a short time. The aid of business administration students in a local college was solicited in summarizing the wage information. (Stanford 1950, 867)

These examples reveal three important factors in the ability of firms to transition to accrual accounting. First, transition challenged firms‘ analytical, staffing and financial capabilities. Second, firms needed access to actuarial skills and knowledge. While they could have ignored the emergence of actuarial science, they engaged them, shifting power to that professional group. Third, firms had to believe that the actuarial calculation was the ―correct‖ cost estimation, which implied acceptance of the actuaries as experts.

While the introduction of a particular accounting practice may appear to be a technical exercise, this instance reveals that, in contrast, to effect this change in accounting, employers would have to make three key choices each of which could deplete their power.

4.4 The first two Accounting Research Bulletins

Actions taken by employers can be contrasted with the actions taken by the

Committee on Accounting Procedure. Taken together, the actions of both agent groups reveal the dynamic of power relations with these two key constituents and its contribution to the development of accounting practice and the pension system.

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In 1948 CAP issued its first pension accounting bulletin: Accounting Research

Bulletin No. 36 – Pension Plans – Accounting for Annuity Costs Based on Past Services.

The opinion was narrowly framed to deal with only the past service cost which arose when a new plan accounted for employees already in service with the employer. The bulletin stated merely that, since such costs are incurred ―in contemplation of present and future services‖, costs for past service should be allocated to current and future periods, but not to surplus. After the publication of ARB No. 36, its drafters made efforts to follow its use ―with a view to appraising the need for a further bulletin on this subject.‖ It published columns devoted to pension accounting in the June, 1949; March, October and

December, 1950; and May and August, 1951, issues of the Journal of Accountancy to keep the subject before its readers.

In 1956 the CAP released the contentious ARB No. 47 Accounting for Costs of

Pension Plans. The CAP was facing a complex set of issues. First, its internal squabbles made consensus impossible. Second, firms were continuing to use widely different accounting methods. Third, the discourse put forward a moral obligation of maintaining a pension plan, but no formal institutional position explicitly did the same. Finally, the success of the industrial pension system was important, already a complement to the US

Social Security programme and a critical feature in labour relations.

With these in mind, CAP took a middle-ground position. It claimed that there was too much variation in how pension costs were being accounted for. Its preference, expressed in Paragraph 5, was for full accrual accounting of the future promise, which would be accrued during the expected period of active service of the employee, on the

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basis of actuarial calculations. But Paragraph 6 then acknowledged the competing argument which said that full accrual accounting would essentially require management to ―record pension costs in amounts varying widely from his legal liabilities.‖ Also, it would pressure firms to fully fund their obligations to the potential detriment of the firm and its security holders, and fear of this might deter management from entering into a pension arrangement in the first place.

In Paragraph 7, the Committee summarized that while it believed its preferred view would result in a reasonable matching of costs and revenues, it acknowledged that

―…opinion…has not yet crystallized sufficiently to assure agreement on any one method, and that differences in accounting for pension costs are likely to continue for a time.‖

The end result was a fallback position that was weak in terms of actual consequences: firms should accrue the present value of commitments for vested pensions. Vesting was, at that time, still so uncommon that it effectively made the opinion irrelevant. Even after the bulletin, firms continued to use the cash method.

The ARB Bulletins revealed competing interests of that time, but were also a snapshot of the relations of power that had occurred over the prior 30 years. First, accounting had by then fully accepted the actuarial methods developed and put forward by the actuarial profession (according to ARB 47 actuarial methods were the technique upon which to base accrual based accounting). Second, the moral obligation circulating in the discourse made it into the Bulletin, although it was tempered. The message was that it would be better to continue the private pension system, and have accounting theory take a backseat for the moment, than to compromise firms‘ financial positions.

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Finally, if we reflect on ARB 47‘s long term impact we can see that had it mandated accrual accounting, firms might have closed their pension plans as feared. The trajectory of the industrial pension system would have been entirely different from today‘s perspective. This has lessons for today. What we decide in terms of pension accounting standards can shape the path that the whole system takes. Thus, as argued initially, it was not inevitable that we are where we are at today, and we have the capacity to reflect upon this, unraveling where needed or at least understanding that many of the constructs we work with in the pension field are artifacts of these kinds of decisions.

5. Epilogue

The 1960s ushered in a new wave of institutional changes in the pension arena. In

1962, former President Kennedy undertook a review of the system with the view to recommend federal control in some areas. The report argued for extensive federal regulation in many aspects of pension plan design, administration and funding. An immediate justification for federal involvement was that plans were being subsidized via preferential tax treatment, yet tax leakage due to sheltering was estimated at $1 billion

USD per year. Since one stated purpose of preferential tax treatment was to supplement the public retirement security system, the federal government wanted to encourage growth in this private system, and to have some control over its management to satisfy itself of its soundness (Ridgley, 1964). This study resulted in the passage of the Employee

Retirement Income Security Act (ERISA) in 1971, which ushered in a massive restructuring of the legal and financial obligations of pension plan sponsors.

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One result of the President‘s report was to increase dialogue between the accounting and actuarial professions. Actuaries, already recognized as the experts, were further entrenched in this role by virtue of the proposals for legislation in assumptions, minimum funding requirements, vesting, investments and other areas in which their knowledge would be needed (Ridgley, 1964, p.1264). For their part, the actuaries believed that ―...the government needs, and in fact wants, learned opinions and suggestions in this area‖ (Society of Actuaries, 1966, p. D381).

Accountants and actuaries were each on a mission to educate the other about their role in this new era. In 1960 the Society of Actuaries Board appointed a Committee on

Pension Fund Accounting to define the boundary between actuarial and accounting involvement in pension plan funding and reporting. In 1964, a Panel Discussion was struck to deal with the ―Relationship between actuaries and certified public accountants…to explore, with the Conference of Actuaries in Public Practice and the

American Institute of Certified Public Accountants, the possibility of acceptable and relatively uniform standards of accounting for pension costs‖ (Society of Actuaries, 1964, p.197).

The result of these and other ongoing deliberations was Accounting Opinion No.

8, released in 1966, in which both accountants and actuaries had weighed in on the directions for pension accounting (Hall and Landsittel, 1977). Noted as an interim measure, it gave way to further developments. After ERISA was enacted, the complexity of accounting and determining the costs of newly required vesting and minimum funding provisions gave a new meaning to ―debate‖ in this field. SFAS 87 eventually supplanted

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Opinion No. 8. and is today in the midst of being replaced. Today‘s debate includes even broader institutional considerations such as the international harmonization of accounting standards and the growing strength of institutional investors, which have added layers of complexity to the issues, making the concerns of the past seem quaint and unimportant.

Yet, it is just these past concerns that we must turn to if we are to better understand today‘s debate. Since, as Miller and Napier (1993) express it: ―at different moments, and in relation to diverse forces, particular ways of calculating have been borrowed from domains such as engineering, actuarial science and economics‖ (p. 632).

6. Discussion and Conclusion

This study‘s aim has been to show pension accounting in action, revealing both its social embededness and how it changed via its intersection with the actuarial profession.

It has done so by constructing a genealogy of the moments in which the accounting and actuarial professions merged, when accountants adopted particular actuarial techniques, and when these began to be privileged within the discourse surrounding the topic of pension costs. It has found that pension accounting became ―what it was not‖ over this period through a multitude of social factors. This has helped us understand that where we are today is not the result of an ―unbroken teleological narrative,‖ but more than this, it has revealed some important insights into pension accounting.

The study shows that economic logic cannot fully explain pension accounting‘s evolution. In contrast to the view that the development of pension accounting standards is

―predictable, logical, and based on easy to comprehend compromises between various competing interests‖ (Carpenter and Mahoney, 2006), this study reveals its

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unpredictability, and points to a configuration where pension accounting emerged within a coming together of discourses about moral obligations, actuarial expertise, labour negotiations, and the provision of social security within the US during the first decades of the twentieth century. Within these discourses and within this era, a view of retirement security emerged that was helped by service providers, politicians, academics, labour, employers and workers, all of whom shaped accounting practice and ideas about pension accounting.

As indicated by Preston (1992), such discourses must be situated within their social context since they were both constituted within, and constitutive of, a politics of responsibility for future pension costs and the practices of the Actuarial Society, the SEC,

Labour unions, and the legal community. Also, they must be situated historically. Their influence on accounting practice was seen to emerge during the period of scientific management and truth-finding through science, as well as the much broader societal debate about who could be made ―responsible‖ for the financial needs of the elderly.

This study revealed accounting in action, specifically accounting‘s constitutive role, which is exemplified throughout pension accounting‘s history. Three examples illustrate these findings. First, this paper has glimpsed the hybridization of actuarial and accounting knowledge. In this way, it has been able to reveal how accounting shaped its own development through the merging of actuarial techniques with its own practices.

Examining the actuarial connection also shows us that actuaries needed to view pensions as long term entities in order to apply their knowledge, and this view was absorbed into accounting. It was the view that enabled the reporting requirements to develop as they

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did. Yet, today‘s debates centre on a mark-to-market view, in which the employer‘s ability to smooth its risk over time has been reduced or eliminated in the name of transparency. Yet, how, and why, those two conflicting conceptualizations of pensions have been adopted at different times and serving different ends is not-well understood.

The second instance of a constitutive role was revealed when cash accounting contributed to the ―crisis‖ in funding by creating unpredictable cash flows for companies.

This drove open a role for actuarial science to, first reveal and make visible a problem, and then reveal techniques to manage the ―risk‖ of that problem. This, in turn, gave accounting the tools to conceptualize a long term view of pensions, hence the ability to begin to report in the ways that developed. All of these events took place beyond the organizational boundary and beyond the boundaries of technical accounting, revealing its social embededness. Indeed, the evidence showed that formal, technically-oriented accounting agents and institutions gave some of these issues little attention until much later, and even then, formal pronouncements such as the Accounting Research Bulletins said little.

Finally, Accounting Research Bulletin 47 was one more example of how accounting can both be influenced by the social and how it, as a technical practice, can act upon the social. The bulletin was strongly influenced by political and social factors, and went on to influence the development of the pension system. As noted, had its drafters mandated accrual accounting, companies may have closed their plans or designed them differently, perhaps as defined contribution style plans. This finding is linked to the current economic research examining accounting‘s impact on the closure of pension

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plans. These studies privilege the economic rationales for doing so, but fail to recognize both the broader societal settings in which closures take place, as well as the constitutive role that accounting plays on itself and on the pension system.

The need to understand pension accounting‘s social embededness was also demonstrated throughout the study. Two of the study‘s findings can illustrate this. First, how we accounted for pensions depended upon how they were viewed outside the organizational boundary. For example, the two early accounting methods, the deferred wages theory and the human depreciation theory, depended on the view taken of the pension‘s purpose. Also, the in-depth look at the discourse about employers‘ moral obligation for continuing pension plans revealed that this view provided the conditions in which a particular accounting for pensions was able to emerge. How pensions come to be regarded and thought of outside the organization, in wider social settings, influence how we account for them. Yet, economic research tends to miss this point, assuming that how we view them is a given, and not subject to shifts in thought or social factors.

Second, research that removes pension accounting from its social context ignores the importance of the actuarial profession on its development. Actuarial knowledge was, and continues to be, part and parcel of pension accounting. The study has revealed that employers had to make specific choices about the privileging of this knowledge in order to effect certain types of accounting. Also, employers had to learn to use this knowledge.

Rather than a set of accounting rules created in and for the organization, these were techniques and practices created outside the organization, demanding specific expertise, and asking that employers divest some of their power to this profession. These point us to

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questions in the here and now, that can open up further research questions. How are practices that are grounded in this set of external knowledge taken up by firms and investors? Why does accounting continue to privilege actuarial knowledge when it contributes to the complexity that makes disclosures of questionable value to investors, baffling standards setters and investors alike?

In terms of today‘s debate about pension accounting, the study illustrates that where we are today is an outcome of choices made in the past. We have the capacity to undo certain choices, but that capacity is lost if we believe, as in the traditional view of history, that we are merely on a path of continuing to narrow our options as we evolve towards the ―right‖ answer. The traditional view claims that:

Accounting for pension costs has … followed an evolutionary path from a highly flexible beginning to a more narrowly defined present. Chances are that the future will hold even more uniformity. (Kreiser, 1976)

Yet, we don‘t necessarily follow a successively narrower path. Where we are today was not ―inevitable‖ (Miller and Napier, 1993). It is the result of a complex of social and political forces outside the organization that have shaped and influenced every aspect of accounting for pension costs. The debate is ongoing. We are now in yet another phase of debate. Pension accounting standards are converging from permitting international differences to mandating similarities. Thus, the past again echoes in this current debate. We have much to learn from what happened at that time before we press on with a, possibly futile, search for the elusive ―true pension cost,‖ since this study has

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shown that this cost has been constructed by many political and social forces. As noted by Miller and O‘Leary (1987, p. 237):

Genealogy concerns centrally a questioning of our contemporarily received notions by a demonstration of their historical emergence. The point of history in this sense is to make intelligible the ways in which we think of today by reminding us of its conditions of formation.

Today‘s debate assumes that the institutional structures (pension systems, regulation, the views of Labour, plan design and reporting needs) are immutable. Yet, the formation of these can be traced to shifts in thinking when things were clearly different.

As well, today‘s debate also typically views pension accounting as narrowly related to economic logic. This fails to recognize the social embededness of the emergence of pensions, and pension accounting requirements. Perhaps we need to agree to disagree, or at least agree that we cannot reduce the answer to questions of accounting theory alone.

For this is one area in which accounting may never be able to be removed from the social.

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ACCOUNTING DURING A LOST DECADE: THE ROLE OF ACCOUNTING IN

THE

MODERN GOVERNANCE OF INDUSTRIAL PENSIONS

1. Introduction

Undeniably an important component of the global economy, assets held in the pension system amounted to $25 trillion at the end of 2008 (IFSL Research 2009). But size and importance has not meant success. KPMG has suggested that 2000-2010 was the

―lost decade‖ for pensions, with ―everyone (being a) pensions loser‖ during this time as a result of rising costs, rising cash needs, and lower values for individuals‘ pension accounts (KPMG, 2009, 1).

Demographic trends, such as increased longevity, falling birthrates and early retirement have meant rising dependency ratios (working age to pensioner ratio). State pension systems in numerous countries have been under increasing cost pressures and critiqued for inadequate benefits. And, occupational defined benefit (DB) schemes have been plagued by deficits, suffering with market downturns and falling interest rates that increase the value of plan liabilities. Although in some cases DB arrangements have been retooled to deal with these issues, for the most part, plans are now simply based on defined contributions (DC). The phenomenon is global.

With ironic timing, in the midst of this ―lost decade‖ accounting standards have been in a state of considerable flux. Beginning with Financial Reporting Standard No. 17

(FRS 17): Retirement Benefits in the UK and recently introduced Statement of Financial

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Accounting Standards No. 158 (SFAS 158): Employers‘ Accounting for Defined Benefit

Pension and Other Postretirement Plans (FASB 2006) in the US, firms have had to grapple with the implications of the introduction of these rules on their strategic decisions regarding benefit provision. Conceivably, these changes, which have coincided with a number of plan ‗freezes‘, may have been partly responsible for the decision to modify the pension scheme, in order to minimize the reporting impact by removing it partly or totally from firm financials. One such modification, linked to the plan freeze, is the move to DC plan design.

The implications for this shift cannot be overemphasized. In DC plans, investment, design, inflation and mortality risk are transferred completely to individual workers rather than being shared across the population and over generations. With the off-shifting of risk, some efforts have been made to provide employees with the tools, information and education to be able to handle this additional responsibility, but these have not been highly successful. Employees must decide whether to join, the amount to save, and their asset allocation, all of which impact their levels of retirement outcome

(Almeida and Fornia, 2008; Benartzi and Thaler, 2007). DC plans are widely viewed to generate lower levels of retirement income on an individual basis. This has public policy implications since the concern is that a large proportion of the population will have insufficient savings for retirement.

There are capital markets implications as well. Overall investment in the markets is expected to be lower under DC schemes, since the average percentage of salary deposited into these plans is lower (IFSL 2009). Also, much shareholder activism has

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relied on the large pools of DB assets, and indeed, pension funds are credited as a driving force in social and environmental proposals (Hess, 2007). DC plans dilute holdings to individuals, eliminating the role for pension funds in these matters.

Other policy implications include the impact of DC on the structural composition of the labour market itself. Retirement-date becomes heavily influenced by market outcomes. When markets perform poorly, more and more retirement-age individuals remain in the workforce. The DC mechanism essentially ties ones‘ income in old age to the unpredictability in markets ,producing ambiguous retirement ages and (and has happened) retirement accounts that can be wiped out with a single market downturn, leading to unanticipated personal hardship and anxiety for the individual plan member

(Atanasova and Hrazdil (2010), citing Friedberg and Webb, page 6; MacDonald and

Cairns, 2007; IFSL 2009). And, even though most union plans are entrenched in DB, even in that environment there has been movement. The shift to DC removes a host of areas for bargaining from the labour-management perspective.

Given this host of negatives, it is clearly important to determine what sort of contribution accounting may play in this process. Although considerable work has been done to answer the question ―Why do firms change their pension plans from DB to DC‖, only a very recent body of literature in accounting (most in working paper format) has begun to study the influence of accounting standards on firms‘ decisions to amend their existing pension benefit plan strategies.

As shown below, this research has been inconsistent in its findings and has struggled with modeling the accounting-pension link. This study hopes to contribute by

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revealing the issues that arise when we conceptualize the accounting-pension link as a binary one between the accounting standard and the firm. Specifically, the study shows that firm decision-making about pension design exists within an assemblage comprising human actors in a formal ―pension governance‖ structure. This assemblage has been ignored in the extant research, and yet any decision about plan design must play out within this network.

2. Accounting and Plan Design

Just what is the theoretical link between accounting and plan design? New accounting rules are attempts to rectify perceived problems caused by past smoothing, and they are a part of a larger international movement toward fair value accounting.

Dictating that more and more ―transparent‖ pension disclosures hit the financial statements, the rules require that firms manage new types of volatility. This is at odds with traditional pension theories that have developed strategies to deal with short-term volatility in order to make the plans feasible in the long term (Fore, cited in Clark and

Mitchell, 2005).

Secondly, cash contribution requirements have a big impact on budgeting, capital investment and financial management. When a firm makes ―special‖ contributions to make up for shortfalls, these cash outflows have an immediate and negative impact on other aspects of its business. Additional contributions can impact capital expenditure plans, acquisition of new debt, dividend payout, research and training budgets, and R&D expenditures (Rauh, 2006, Hewitt 2009). Thus, the plan and its management, although legally distinct from the firm, has significant bottom line impact.

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Thus, theoretically, increased or unpredictable cash flow needs, and increased volatility in reported earnings, as well as the incorporation of pension surpluses or deficits on the balance sheet, may cause firms to ponder whether to adjust the pension arrangement in place. One way to remove the reported impact is to modify the arrangement by terminating the DB plan, or by implementing a ―freeze‖ (which involves a range of options centered on ceasing the accruals in the plan), and then converting the plan, or establishing a new one, to a defined contribution arrangement, for future entrants.

Freezing a plan involves closing it to either just new entrants, or to both current members (whose accruals would stop) as well as new entrants. This would begin to reduce the impact of the plan on the financial statements, but not completely eliminate it.

The only way to eliminate it would be to terminate the plan. This option, however, involves numerous legal and other requirements making it a much more difficult and potentially costly decision. Thus, many plan sponsors opt to leave the existing DB plan in place but shut it down for future benefit accrual.

There are numerous explanations about freezes and the movement from DB to DC

(Munnell, 2006). Structural workforce and industry changes explain some of the shift: since defined benefit plans are typically found in union firms, large firms and certain specific industries, the trend away from these industries toward (non-union) service firms has meant that ―much of the trend toward defined contribution plans as primary plans simply reflects changes in the mix of jobs‖ (Aaronson and Coronado, 2005; Gustman and

Steinmeier, 1992, 362). A large body of survey work has been conducted, primarily by benefit consultants. AON (2009) lists the top three considerations as financial volatility,

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high costs and administrative time and expense. The confluence of economic, demographic and regulatory risks, global competition, volatile financial costs, isomorphic trends, individualism among employee groups, and mobile labour markets have all been identified as making DB plans relatively less attractive (Greenan, 2002; Hamilton and

Vandersanden 2004; Mercer, 2002).

Alongside studies seeking general motivations for plan closure are recent works examining whether there is a direct link between accounting and plan strategies. The general model is to examine a particular accounting or financial metric and determine whether it has some relation to the firm‘s announcement to close or modify the plan. At this point, however, most of these are in working paper format. Three of these are examined below to provide a counterpoint.

Klumpes, Li and Whittington (2009) examined whether firms that more frequently update their expected rate of return on plan assets assumptions are less likely to terminate or freeze their DB plans. They found a relationship between more frequent updating, which they considered a risk management technique, and closure of plans, thus proposing that accounting and pension management are not independent of one another.

Atanasova and Hrazdil (2010) tried to examine the motivation behind plan freezes by examining the particular characteristics of the plan, not the firm. They posit a stronger influence of plan-level characteristics than firm-level characteristics (such as access to financing and expectations of firm growth). Contrary to other research and to popular belief, they found that plans with higher returns on fund assets and healthier funding ratios are more likely to freeze.

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Beaudoin et. al. (2009) expected that firms anticipate new rules before they happen as a result of FASB‘s due process, increased momentum towards international harmonization of financial accounting standards, and articles in the financial press. Thus, they wanted to capture the association of anticipated financial accounting changes with the pension freeze decision. They examined 147 firms that announced a freeze during

2001 to 2006, beginning with the issuance of FRS 17 and ending with the issuance of

SFAS 158. They were interested in whether firms would freeze their plans in anticipation of FRS 17-style reporting requirements. At the firm level, they found that less profitable firms, and those whose plans had a poorer funded status, were more likely to freeze.

Contrary to their hypothesis (and to most other research), cash flow/contribution requirements had no influence on the freeze decision.

Thus, scant research has addressed the recent motivations to freeze plans in connection with the current wave of pension accounting standard changes. The results are inconclusive. Apart from the aforementioned studies, accounting research has tried to get at the impact that accounting may have played in other ―design‖ decisions, such as investment strategies in the plan, and found that volatility in reported pension expense has impacted firms investment strategies (Wiedman and Wier, 2005). Another stream of research, not specifically related to the current study, has examined market reactions to particular aspects of pension accounting, finding that how the plan is accounted for may factor into firm valuations (Joss, 2006, Coronado and Sharpe, 2003; Hann et. al., 2007;

Picconi, 2006; Wiedman and Wier, 2004; Rubin, 2007).

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The current study addresses an important gap in the literature that currently models the pension-accounting link as a binary relation. All of the aforementioned research has tried to examine a model of decision-making that seems to imply that the decision is made by ―the firm‖ or by ―management‖ on the basis of a set of empirically observable factors about either the plan, the firm, or accounting variables. That model ignores the institutional setting that comprises the decision-making environment, which is a critical and overlooked factor. In fact, ―the firm‖ is faced with a complex situation, in which legally it is required to manage the plan for the benefit of plan beneficiaries, while at the same time, trying to serve its own interests. This classic conflict is further complicated by the fact that the ―firm‖ or ―management‖ is not necessarily the point of origin for any decisions whatsoever. Rather, individuals composing a quite broad assemblage, referred to herein as the plan governance structure, make these decisions within a relatively constrained institutional framework. The individuals in this setting, their backgrounds and strategies, are important features when it comes to what work gets done in the assemblage, what items are brought to light, and what eventual outcomes look like. This study highlights that decisions on plan strategy are in fact better modeled as strategies taken within a technique of governance that has its own particular characteristics.

The aim of this study is to show empirically, through a study of the field and of firms within the field who have made plan changes, how the governance process is a key driver of whether, and to what extent, accounting ―matters‖, and how it is simultaneously a strategy, a technique and a rationality. It does so by considering that the pension

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governance framework is an example of an assemblage in the governmentality sense, as described in the next section.

3. Theoretical Framework and Method

3.1 Governmentality

The governmentality framework, informed by Foucault‘s writings on the subject and expanded considerably by Rose, Miller and Rose, Dean, and others, has been used widely in accounting research. It offers a way to see the interdependencies between what we understand as rationalities, programmes and techniques. These have been defined in various ways, but essentially stem from Foucault‘s premise that we can think of governmentality as an ensemble of ―institutions, procedures, analyses, and reflections…the calculations and tactics that allow the exercise of this very specific albeit complex form of power,‖ (Foucault, 1994, 220).

Taking it a level deeper, Dean (1999) stated that we must ―distinguish between the strategy of regimes of practices and the programmes that attempt to invest them with particular purposes,‖ (Dean, 1999, 22). Thus, while rationalities present general representations of the world, programmes set out frameworks for action. A programme seeks to establish congruence between the broader appeal of political rationalities and the plans that address more specific problems.

A discursive programme… only fulfils its vocation when it has as its counterpart an adequate technology. What the programme contributes to the technology is a more general rendering of reality in a form such that it can be known, a rendering visible of certain activities in a way which is intelligible by virtue of certain general categories. A programme is also the space for the articulation of

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problems, negotiation and conflict over interests. (Miller and O‘Leary, 1987, 240)

Rose (2000, 322-323) summarized the various contributions that governmentality analyses have offered. This line of work has described the rationalities and technologies underpinning interventions, demonstrated that the problems identified as governable have been historically situated, examined the sites within which these problems come to be defined and delimited, and the diversity of authorities that have been involved in more or less rationalized attempts to address them. They have looked at languages of description that have made problems thinkable and governable, and revealed their dependence on the concepts, explanations, arguments and theories of a wide variety of experts.

This study posits that pension governance is such a programme, an ensemble of practices, institutions, activities and knowledges, with the following general characteristics:

1. A framework of accountability, normally disclosed in a terms of reference for various

committees at varying levels in the organization, along with various external

consultants and service providers. These committees meet on a regular basis (usually

quarterly).

2. A focus on written documentation outlining the specific tasks, accountabilities, etc.,

in order to meet the legal requirement for following a particular ―process‖ in

discharging a fiduciary obligation.

3. Identification of a variety of experts consulted on in relation to particular features of

the pension plan itself. The primary agent in this regard is the actuary.

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4. A legal and regulatory net that crosses between judicial and statutory laws, but is

primarily grounded in the notion of fiduciary obligation to the beneficiaries of the

pension plan.

The fiduciary principles come into play since the assets of the pension plan are being held, in trust, on behalf of the plan beneficiaries. Therefore, the corporation and the pension plan are two distinct legal entities. The governance structure includes representatives from the corporation, at varying levels, and from different functions, and sometimes includes employee or union representation. The exact composition of the governance structure can vary, but it is within this assemblage of techniques that truth discourses become operationalized. Thus, reducing accounting and design to a binary relationship is a challenge, since accounting plays out at the higher level of discourse and at the technical level – both of which are shaped and transformed within the programme of the governance structure. Additionally, other forms of thought continually attempt to influence the governance process, to ―reform or radically challenge their operation, to reorient them to new goals and objectives, and to act upon the desires, aspirations needs and attributes of the agents within them.‖ (Dean, 1999, 22).

The programme of pension governance is the site of decisions that are made through the negotiation of a multitude of interests, and are informed by a continuing stream of rationalities at the discursive level. As set out by Radcliffe (1998), rationalities

―deal with general ideals. … Programmes are concerned with the detail of how political rationalities might be accomplished, (providing) the intellectual machinery that allows abstract political rationalities to be implemented,‖ (p. 380). Thus, the pension governance

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programme, the site which the ―rationality‖ of effective management of the pension obligation is to take place, is also the site in which other rationalities are adjudicated, debated and implemented. Although different rationalities enter into this sphere, and try to ―invest them with particular purposes‖ (Dean, 1999, 22) this study takes the position that two important and intersecting rationalities adjudicated at this level are the fair value movement and the risk management framework.

Although most accounting literature has empirically examined accounting as a technology that is interdependent with a particular mode of rationality, this paper adopts the view that accounting is part of a rationality that infiltrates at the level of the programme and its technologies, and provides empirical evidence of how that happens.

Less attention has been paid to how the discursive elements of accounting aim to reform other technologies, and how accounting has to compete with competing or complementary rationalities. Thus, the study shows what the pension governance programme does to give effect to the rationality of accounting, whether that is fair value accounting, reported amounts or cash flow needs, especially in regard to its competition for attention at this level.

The pension governance programme is not a passive site of adjudication. Rather, decisions are often contested items, each process for making the decision involving strategies and tactics. It is therefore an excellent opportunity to observe accounting as it competes for attention. This is the site in which various forms of power are enacted in the multitude of practices infused into the programme‘s operation. Also, certain forms of resistance occur against the periodic dominance of accounting, in the sense that Foucault

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noted the ―myriad ways in which individual subjects who were armed with specific regimes of practice could reinscribe or resist hegemonic norms,‖ (Nealon, 2008, p.2).

Thus, the analysis proceeds to investigate the programme that is pension governance in order to detail the processes by which accounting comes to be negotiated and used by the agents in the programme. When are these characterized as competing regimes of truth, and when are they complementary? It is the governance process that is the field upon which this battle takes place, thus an attention to the micro-processes as well as how these are shaped by and justified according to certain knowledges within the broader assemblage can help us to understand how accounting comes to play a role (or not), in plan design.

3.2 Method

The aim of this study is to understand how accounting for pensions impacts plan design, and the working of accounting within the decision-making structure (the pension governance programme). The study‘s research method was a case study of the institutional field comprising the pension industry in Canada, with particular emphasis on the institutions and agents in the field that make a difference to plan design.

The study began in 2008 and spanned a two-year period, during which time I had access to increasing numbers of individuals comprising the pension field in Canada.

Research began in Western Canada, in a staged process. This involved a first phase of informal conversations, as well as reviewing a considerable amount of literature and documents available online and through the public domain (industry publications, academic commentaries, regulatory policies and pronouncements). As a researcher who

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had formally been employed in this field, I recognized that I brought prior years of knowledge regarding some of the key points that I wanted to examine. While this offered some benefits, it also raised the issue of bias. However, two factors mediated any particular preconceptions I might have had. The first was the interview subjects‘ extensive knowledge and seniority, and current experience in the industry, both of which proved to over-ride any preconceptions I may have brought into the research. The second was that through the flow of the research process, I continually checked my ideas by asking questions that served to confirm or dispute what I believed, and I ensured high levels of sensitivity to any disconfirming information.

The method followed was in keeping with a sequential research approach, in which phases of information gathering take place, each phase playing a different role in the process (Everett, 2002; Neu et.al., 2009). Phase one consists of an attempt to map the social field under study (Everett 2002, p. 73). The aim is to gather sufficient information to be able to enter a new phase which then more precisely examines how the field works, and more specifically targets the research questions, via interviews with agents in the field along with others who have knowledge of the field. Interviews can be supplemented with ―hard‖ data, documentation and archival information. Subsequent phases continue until a saturation point is reached, meaning that the researcher ―brings new participants continually into the study until the data set is complete, as indicated by data replication or redundancy. In other words, saturation is reached when the researcher gathers data to the point of diminishing returns, when nothing new is being added” (Bowen, 2008, 140, emphasis added).

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Thus, in this study, phase one occurred over a period of one year when an initial set of interviews, as well as document reviews, were conducted to develop a mapping of the institutional field of pension governance. Through those interviews, a snowball sampling technique led to suggestions for other individuals with whom to have conversations. I was granted access to individuals at four firms that had recently (within the prior two years) undergone a design change. Three of these firms were analysed as part of the institutional field, while one was highlighted as a ―mini-case‖ (ResourceCo) to illustrate the theoretical implications derived from the broader field study.

That case was selected for the unique access that was granted, as well as the representation of its fundamental characteristics to the items under study: a design change had occurred, accounting was referenced during the change, and the governance programme was the site of decision-making. All of this occurred during a moment of change – when the firm was under particular financial pressure and the pension was under scrutiny – thus, at this point in time the workings of the governance process and how it utilized accounting information was brought into view very clearly. Regarding access, it is considered rare for firms to divulge the details about their pension decisions to the level that this firm was willing. It is also rare for firms to permit access to the actuary for the plan. Some of these walls are a result of the very sensitive nature of negotiations of employee benefits, but also the competitive positioning which goes on vis a vis other industry participants. Typically, information on these matters is gathered

―from a distance‖ via surveys or aggregate data sources. But these approaches lack the

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insights that can be gleaned from an in-depth understanding of accounting ―in practice‖ as it winds its way in and out of the governance programme.

Thus, phase 2 consisted of in-depth interviews and data gathering over a nine- month period within both the institutional field and at the site of ResourceCo. Actuaries, regulators, and individuals with other professional knowledge within the field were interviewed, normally at their places of business. Interviews conducted on-site offered the added benefit of immediate access to ―supporting‖ documents, reports and other information sometimes used to illustrate certain points. Over the two year period, approximately twenty-five interviews were conducted. Interviews lasted from 45 minutes to two hours and were tape recorded and transcribed, except for five interviews for which handwritten notes were taken. The transcriptions were then coded for themes and ideas that I entered the field with, and were also assessed for emerging themes that had not been considered prior to the research.

The case study method was selected purposely. Case studies are focused on understanding the dynamics present within single settings, and are used to provide description, test theory or generate theory (Eisenhardt, 1989). They offer ―the possibility of understanding the nature of … accounting in practice; both in terms of the techniques, procedures, systems, etc. which are used and the way in which they are used‖ (Scapens,

1990, p. 264). This study provides much-needed nuance and context to the pension accounting research. To date, research has ignored the governance programme in which accounting must function.

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Lack of generalizability is a weakness of the case study method, and this study is no exception. The focus on a single case in a particular institutional field will of course lead to questions about its application more broadly. We cannot know whether what happens here is representative of what happens in other firms, for example. However, it is well recognized that the case study methods offers insights not particularly hampered by generalizability concerns. Indeed, the method has advantages despite this problem, and those particular advantages are well suited to the aim of this study. The goal of the current study is to examine how accounting is used within a particular institutional field, so that we can better learn how it may, or may not, impact on the provision of pension and retirement plans. Since accounting must flow through the unique governance programme in order to ―work‖, it is necessary to understand this programme and how accounting works within it. The programme itself comprises a number of both technical and social dynamics that are not easily explored via a large data set study. Case studies

―facilitate an exploration of target setting and its wider organizational context in ways that would be infeasible in larger sample studies‖ (Cooper and Morgan, 2008, p. 168).

In this particular study, much of what happens regarding decision-making in the pension setting is ―hidden‖ from view. Decisions are made within a target setting (the governance programme) that is intricately linked to the wider organizational context.

Research concerning these decisions must understand the issues at play in this setting before being able to begin to isolate factors for examination. Beyond the application to larger data-set research, by focusing on a single site with a targeted case study approach, we can examine the social processes that emerge when accounting filters through and

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becomes an input. Research on audit teams has uncovered similarities to the processes discovered here, since it is not only auditors but also pension committee members who

―are situated in the context of intensive, ongoing interactions with other members of the

… team…they work in cluttered, crowded conference rooms, not laboratories,‖ (Cooper and Morgan, 2008, p. 168 citing Pentland, 1993). Despite the limitations, I believe the approach is well suited for the aims of the proposed study.

4. Analysis

The analysis is focused at two levels, the field and the specific case. First, at the field level, the aim is to examine how accounting moves through the field that comprises pension governance by using the notions of a governmentality framework that can describe the reality of decision-making. In this sense, the case study attempts to be

―explanatory‖, to ―generate theory that provides good explanations of the case,‖ without a focus on generalizations. Thus, the first part of the process is the theoretical development, that is, the emergence of the governmentality perspective as a means by which to view accounting‘s path through towards decision-making. The second level is the individual case which uses the theoretical development from the field study to examine the particulars of the setting.

Drawing on the idea of governmentality shows us that accounting‘s influence in the design process depends on its ability to gain entry to the very formal, legally- grounded governance programme in order for it to have any effect on the output (plan design). The criteria for entry primarily constitutes materiality, but contrary to a rational

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model of materiality that would involve some type of quantitative threshold, materiality here relies significantly on implicit knowledge, gut feel and practical wisdom.

Second, the study posits that accounting, here modeled not in its technical form but rather as a rationality, becomes subjected to two forms of disruption. First, the regime of practice or technical governance programme shapes and forms what accounting is able to do. This occurs at a primarily micro level. Second, other rationalities compete with accounting for influence on plan design. These rationalities emerge at the macro level and are debated and become part of individual strategies at the micro level.

4.1. How accountings enter the programme level where it vies for attention with other competing rationalities

This section examines when and by what processes ―accounting‖ in its various forms enters the consciousness of the programme‘s participants and the field of the programme itself. The issue is ―when is it material enough to warrant attention‖?

Research models the materiality of the plan by virtue of its size on the balance sheet, positing that larger plans matter more, since the reported amounts will be more visible, or contribution requirements will be higher, which will have more impact on decision-making. But this poses problems. It assumes that some form of calculative technique precedes knowledge of materiality, and it ignores the long-held knowledge that comes from experience and technical expertise without resorting to quantitative metrics.

Materiality, modeled in this way, leaves out the processes by which a firm comes to know that a plan is material enough to matter. It also ignores the idea that perhaps materiality is known more by gut feel than by any objective standard. The issue is to

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determine how, and through what processes, it becomes accepted that accounting for the pension plan is material enough to warrant attention in the decision-making process.

We would love it if someone would say pension expense or cash contributions exceeding this number are unacceptable. Virtually no one can answer that question. Part of it is because if the costs aren't material now how do you know when they start becoming material? CFO may have a view, the president may differ and then you have a pension committee that's thinking about a lot of things and I know of one client where the VP of HR and CFO both tried to answer the question and they both came up with very different answers. So what is the corporation's answer to the question? They don't have one. (Respondent 5)

There was resounding consensus from subjects that in most cases those responsible for the pension plan somehow become aware of the materiality of accounting and cost through various means that have little to do with particular metrics. In most cases, no method for quantification was used and no particular accounting measures are taken into account. While this could be confirmed with another methodology (e.g. survey), there is evidence from the field study to reveal what takes place within the governance programme.

Additionally, the governance programme is a multi-layered process in which the role of some individuals is to provide technical information and analysis, and the role of others is to absorb and make decisions. Accounting‘s role depends in part on which of these agents uses it. Decision-makers in the programme frequently rely on intuition, big picture thinking and practical wisdom to understand which issues are important. Related to this is the governance programme‘s structure. Subjects continually referred to the meeting requirements. Meetings, as part of the governance programme, take place on a

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regular basis, often quarterly. Each committee in the governance framework will have its own schedule of meeting requirements. While the management-level committee may be specifically devoted to the pension plan, by at the board level meeting, time devoted to the pension plan may share space with many other agenda items. Analysis and explanations have to be given within the (normally short) time frame allotted to the pension plan. At those meetings, actuarial reports, investment reports, legal matters and other items fill the time and accounting must compete for time and attention of the participants. Thus, whether it is able to get ―table time‖ is uncertain. The following example from the senior manager of pension and benefits at a large organization reveals this uncertainty:

And it's funny because in preparing that meeting, our … CFO … I did say, hey, did you want to look at things like cash flow for the pension fund as a percentage of all of our cash flow? You know liabilities as a percentage of our total liabilities, or net surplus, deficit, … IFRS impacts. You know if interest rates change by 1%, what would it look like. And she (said) no we don't want to look at that. I think it probably was in the context of presenting to the full board, they wanted to keep it simple. But I do think that it's kind of generally been recognized that it's big.

Another item that was brought up numerous times was the impact of facing contributions after many years of not having to make payments into the plan. The plan becomes important at the moment that a contribution holiday27 turns into a contribution requirement since cash flow is affected. This is a binary model: either the plan requires

27 A contribution holiday occurs when contributions are legally permitted (or required) to cease due to an over-funded position.

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contributions or it does not. But it can also relate to contributions that increase in a non- linear fashion: when the plan goes into deficit, special payments are required that drain cash flow. It was iterated that this can play a bigger role than financial, reported accounting numbers.

Interviewer: I'm trying to get at the size of the plans relative to what they represent on your balance sheet. As a metric, do you ever go through that or think about them that way?

Respondent 1: No. Never have to be honest with you. …I think when the rubber hits the road is when you're underfunded and you start making some large cash contributions. There were some large cash contributions in 2007. … That's where people start looking at the plans a little bit closer.

At times, materiality is driven from external sources. The plan may, or may not, be viewed as material from within the firm, but external to the firm it may be considered so. For example, research that measures materiality of debt levels would seem to assume that somehow management is aware in advance of the implications of exceeding a particular trigger. In practice, however, the issue is more complex and is dependent on management having a network of information, individuals dedicated to understanding this information and absorbing it into the governance programme where decisions can be made about it.

This was the case at Transport Co. when, in and around 2008, credit analysts following the company adopted a methodology in which the total obligations of the pension plan (not the net deficit) were considered debt and thus included in ratio analyses. This was a change. The CFO became aware of it by reading newsletters sent to

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him by credit ratings agencies, wherein they would at times publish their approach to pension accounting data. At one point, particular agencies decided to split the plan into its component parts of assets and debt rather than deal with the net effect of the two. For example, when a plan had $90MM in assets and $120MM in obligations, the former approach had been to count the $30MM deficit as a liability for the purposes of debt ratio analyses. However, the change meant that analysts split the plan into components: a $90 million asset combined with $120 in obligations would be considered to represent $120

MM in ―debt‖, rather than $30MM under the old method. This new calculation impacted debt ratios differently. To the CFO of Transport Co. this made no sense, and the bulletins about methodology turned his attention to the plan‘s impact on accounting results.

(I)t was becoming a big deal with some of the credit rating agencies. They were just having trouble understanding it. They would split it apart, look at all this stuff that looks like debt, and if you were on the edge of a particular rating, that might be enough, if you had a big plan to bring you down a notch. In the last couple of years, particularly last year when the credit markets were so tight, getting knocked down a notch, could be quite expensive.

Here, accounting certainly ―mattered‖ to plan design, but it came from the outside, and the way in which accounting came to matter was not simple, and not easily identified through a more traditional study. Primarily, it had to get the attention of the

CFO who raised it as an issue to the governance members. That meant that it then had to make its way through the governance process in order to make any difference. In that process, he had additional information that would justify a plan design change. Through a network comprised of the human resources and benefits personnel at the major

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competitors in Transport Co‘s industry, he knew that the plan was considered an

―outlier‖, being more generous than average within the company‘s peer group. The company changed its plan from DB to DC after approximately two years of analysis.

Materiality of accounting for the pension plan is a moving target and constructed differently in each setting. Not only that, but once it is material enough to get the attention of and enter the governance programme, it becomes subjected to the vagaries of that programme. The next section deals with this concept. In contrast to characterizing accounting as something static, the next section deals with the processes by which accounting is assessed, analysed and adjudicated once it has made its appearance.

4.2. How accounting is adjudicated at the programme level where it competes with other rationalities

So far the field study has pointed to the social processes involved in accounting‘s ability to play a role in plan design. This begins with its ability to get the attention of the governance programme, for only then can changes materialize. Attention-getting ability is situation-dependent and relies heavily on practical wisdom and networks of information of the individuals situated within the programme. Decisions that are made at the level of the pension governance programme are not straightforward, and do not appear to resemble the tightly-connected models wherein a particular accounting change results in a particular design output. But if the link between accounting and plan design is not easily modeled as a binary relationship, why is that, and what does that relationship look like? This study points out that, unlike a well-structured model of decision-making, in practice, decisions are characterized by at least three prominent themes. That each has

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a strong influence on what can be done with accounting. These are 1) Individual agents‘ strategies, 2) resistance of the HR function, and 3) the functional process of pension governance.

4.2.1 Individual strategies

Clearly emerging out of the study was the idea that ―individuals‖ mattered, and indeed they could make or break an otherwise ―rational‖ decision. Therefore, understanding their role in the process is important in comprehending why some decisions are made and others are not, and in grasping why the models that assume rational decision-making may fall short in this setting. Comprising the assemblage are individual agents with varying backgrounds. Their influence on outcomes depends on hard-to-measure qualities such as their ranking within the governance programme, their actuarial and quantitative knowledge, their seniority within the pension field, and lastly, their personality and biases. These are able to play such an important role due to the collective nature of the decision-making process.

I came into the business from the insurance side and I have an actuarial background although I'm not an actuary, so I had a lot of credibility with the finance people. My right hand guy…came out of the trust company business where he again dealt with the financial side of pensions. So …our credibility with the finance side was extremely high. That's one structure.

But then you have others where HR is totally coming from what I would say is the soft side of HR, the more development kind of guys and they and the finance people don't speak the same language and there are concerns around that. HR guys might say, well you need such and such arrangement to attract and retain, motivate and all that

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good stuff, and the finance people will say look at the impact on the balance sheet. (Respondent 2)

Although formal knowledge implies one type of power, informal knowledge gained through popular media when combined with a particular personality or position, can be influential in other ways.

Yes, media influence is huge…the guy had read an article where it said that there probably was a baby that was born that would live 1,000 years now. But he was serious. … It was that concept out there and I'm not exaggerating, that's what he quoted. The various influences by media, the critical thinking that they normally have for business decisions is disappearing because it's been written in the press. (Respondent 12)

Additionally, personality combined with particular biases plays yet another role in outcomes.

The other thing I think is the makeup of the decision makers. For us we have one individual who is extremely conservative, you know the chap is 80+ years old and set in his ways and I don't think you can convince him to do something risky at this point. I don't know if it's something in his past or he got burned or what it is or he's just saying, hey look, I've one more term left on the board and so I want to be nice and clean and no issues. But definitely personality of the board has an extremely high input into why we're developing the policies that we're developing. (Respondent 1)

In summary, ignoring the individual strategies and traits might lead us to believe that considerations of accounting, and plan design decisions, are made by economically rational agents at the level of the firm, based on certain well-defined processes. This is misleading, since it is clear that individuals matter here and decisions are made in a complex setting, not in a laboratory. Additionally, by paying attention to the role of the

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individual within this programme, we can observe that it is unrealistic to assume that management easily makes straightforward decisions concerning these highly complex, quantitative matters involving special sub-sets of knowledge. This focus on complexity and knowledge should be elaborated.

4.2.2 Discomfort with knowledge levels

Levels of knowledge influence the willingness of individuals to follow certain courses of action. Of course, cognitive limitations play a role. But further to this lies a feature particular to the programme of pension governance: its historical grounding in legal and fiduciary principles. Participants are not comfortable, and are generally not permitted, to make decisions when their understanding is unclear, and this is heavily driven by the need to be legally accountable to the plan itself. The following is one example of a common theme that emerged from the study, that fears about lack of knowledge interfere with adopting what might otherwise be considered ―ideal solutions.‖

A much stronger good governance step might be to use derivatives in the pension portfolio to eliminate your interest rate risk. You can do that. That can make a huge difference to your overall risk exposure. Typically it isn't done. It's complicated, the word derivative bothers people. Having to explain that up the line. I mean a lay person pension committee person is not going to understand it. The CFO might understand it but he has to explain it to the president. The president perhaps to shareholders. They don't understand it, so even the opportunity to reduce risk using leverage and derivatives is significant, it's typically not done. It's just too complicated.

We talked to (a client) about interest rate risk management strategies and… using derivatives and leverage. The risk reduction benefit from doing that was multiples of risk reduction benefit coming from adding alternatives. So the

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differences were huge and the chairman of the committee that we spoke to, admitted that the changes they were contemplating making were almost irrelevant, immaterial in terms of risk reduction in terms of what could be done using these more sophisticated strategies. In the end, they said, we could never do anything that different. So peer pressure, we're going to have a normal looking asset mix strategy and we will know that if we do badly, so will others and misery loves company. (Respondent 5)

Lack of comfort with particular ideas can create sticky points in the flow and use of information. On the flip side, sometimes the presence of certain individuals with certain knowledge, combined with their particular positioning in the programme, can create flows where there would otherwise have been none. This is illustrated well by the investment strategy design change pursued by Commercial Co.

Commercial Co sponsored a ―mature‖ plan which was fully closed to new entrants in 2004. To manage its cash flow requirements over the long term, a strategy was investigated that could manage the volatility of the liability that remained. Commercial

Co‘s pension governance structure included a management pension committee that reported up to a Board pension committee. Within this structure there was one staff member who possessed both actuarial and financial training who worked full-time on the management of the pension fund. Thus, his time could be devoted to particular projects for the management of cash flow volatility. In this case, he was approached by an external investment manager offering the idea to implement an investment structure that would potentially reduce cash flow volatility.

I saw this stuff from (X) and I thought this was an opportunity. So I basically went (to the board) and said, hey, this is an opportunity … They were concerned about

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how to manage the plan as a mature plan. They didn't say go out and find a way to solve this but I sort of saw this and thought, okay, I think they're in the right mindset that they would be receptive to doing this.

…

(The project) was a lot of work. It took me close to 3 years complete from start to finish. I think I developed enough goodwill and brought forward a couple of wacky ideas in the past, so they were used to me going out and thinking about these things. So I think I had some goodwill to work with.

You've got to have somebody who has a passion for it internally. If I didn't have a passion, I'd be like, screw this. This is a waste of time. It's a lot of work. And you need somebody who has the technical skills because it became very technically complex…, I'm not saying I'm so great, (but) you need to have that advocate internally for it. You've got to convince backers internally because it is a fight. It's hard because you also have deal with complex issues with people, who it takes a while to get them over it. I really believed this was the right step forward for this plan. I get into trouble if I'm too bored. It kept me intellectually stimulated. (Respondent 6)

Commercial Co. implemented a design change that when observed from a high level would appear to be straightforward. Yet, it took an involved individual with certain levels of knowledge and time on his hands, to bring the project within the governance framework. He then had to back the project to the decision-makers in the framework.

Without his actions in this regard, his personal and career motivations for doing so, his need for ―intellectual stimulation‖ and a host of other factors, the project may never have materialized. Linking the implementation of this design change to a particular metric or emergence of an accounting standard would lose sight of the nuance of the individual‘s important role within the governance programme.

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4.2.3 HR Strategies

As indicated, the fact that individuals comprise the governance programme implies that they also have strategies that they promote within the programme. One which appears often is resistance by individuals from the human resources function to design decisions. As finance and economic analyses have become more powerful within the firm in relation to pension design decisions, HR staff have had to find particular tactics to challenge this authority. As Foucault noted, ―armed with particular regimes of practice‖

(Nealon, 2008), individuals within the programme can offer resistance. The relative strength of the HR staff, along with their ability to challenge any proposed design change given the tools they possess within the governance programme, plays an important role.

These again are social processes that are dependent on power structures, on knowledge levels (we have witnessed the importance of having an actuarial background), and on ability to seize certain tools to push for particular strategies.

The governance programme normally involves somewhat equal numbers of representation from both finance and human resources, and the interplay can be complex.

Indeed, a repeated theme uncovered throughout the study was the mediating effect that

HR has on the decisions in the framework.

It used to be the domain of HR and it's becoming more of a finance responsibility. So there are more clashes on what we should be doing. Has it helped? Well, more people are aware. That's a good thing. It can't be a bad thing. But there are different ways to go about mitigating. Finance might say, cut it out, chop it right off, it's a wounded animal, and HR might try to save it. (Respondent 7)

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Indeed, one theme emerging from the study was the impact on the plan design decision that HR has played. This has not been investigated as a mediating factor (except for the influence of union presence), yet it appears to be important: the site of contestation can be a classic showdown between these two functions in the organization.

At different times, HR has had enough strength to at least mitigate certain design changes.

But you know you're up against the HR challenge of, there are many challenges including HR challenges of telling your employees that you've just scrapped the plan. Just the optics in the HR implications are a serious impediment to that.

Interviewer: I'm wondering if it weren't for the HR, if there would be quite a lot more (closures).

Without a doubt. … If it were done on purely financial grounds, it would have happened. (Respondent 7)

Certainly individuals are the key decision-makers in all manners of organizational decisions. This is nothing new to academic literature. This study aims only to show how individuals thwart decision-making: either by using accounting to justify decisions that are informed from other rationalities, by opposing accounting in the belief of other aims, or in fearing (and opposing) certain tactics that might otherwise make sense based on rational models.

4.3 Governance process

A second major characteristic of the governance programme is how the programme actually ―works‖ in practice. Recall that pension governance is an assemblage with rules about who is to take part, when to meet and what to discuss. Much

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of what happens within the process does so specifically to meet particular fiduciary requirements surrounding the decisions made about the plan. These parameters constrain what is able to take place. They can force gaps in informational flows and create space in the timing of decisions. Research that models events (accounting standards changes) and decisions (closures of plans) may be unable to capture these effects.

An oft-cited example of a governance feature that seems to both contribute, and hamper, decision-making and information flows is the composition of the governance committee itself. As indicated, these normally reside at two levels: within the management of the firm and then at the Board level of the firm. Members are typically drawn from employer (and sometimes employee) groups and represent finance, HR, treasury, legal or any other functions deemed applicable. Thus, there can be high levels of turnover by virtue of general turnover as members move from job to job and firm to firm.

Add to the turnover effect is the practical influence of holding meetings roughly every quarter. Combining the two (infrequent group decision making and analysis along with discontinuous membership) can lead to stalls in decisions, and difficulties with absorption and flow of information. Turnover was cited continuously as a negative issue due to the highly knowledge-intensive nature of the process, and the fact that some of that knowledge is absorbed merely by continued presence within the programme.

That is a huge, huge problem. The problem with that is that every so often these people have to be reeducated. They're years behind in their knowledge and decisions that were made in the past, they have no idea of why. And there's constant, recirculating of ideas.

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Then a new board member comes around, is quite vocal, wants to sharpen his teeth, ―well, the performance rating is terrible over here. We should fire these guys.‖ (A)nd then all the others start to nod. … And all the guys that had been convinced before, in the long term approach making sense, they start nodding and say, yeah. And it (can) alternate between that every couple of years.(Respondent 12)

Apart from the problems with staffing the committees, there is the matter of how long it can take to reach a decision. This was alluded to regarding the timing of meetings, which are often held quarterly, and cover a wide number of issues. For example, at a single three-hour meeting the agenda might cover investment return analysis for the pension fund, new legislation announcements and compliance matters, design issues, funding reports, and also include presentations from external service providers to the plan. Of course, ad hoc meetings can be scheduled between the formally scheduled ones.

However, the point is that the process is constrained by this ―lag‖ between when events happen and when decisions get made.

Adding to the time delay is the time needed to meet the process requirements for fiduciary obligations. Due to the fiduciary principles forming the backbone of the pension environment, decision-making must be able to stand up to legal scrutiny on a fiduciary basis. This means that decisions can only be taken after appropriate analysis, consideration and care, and documented so that they can be held up to potential legal assessment as reasonable and appropriate. It would be rare to have a unilateral decision- making structure in this environment.

Thus, for approval, design decisions necessarily require in-depth, detailed consideration moving through all levels and individuals of the governance programme –

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from actuary to governance committee to internal management to Board to regulator. As stated by one actuary, the entire process from the point that it is identified as an issue to the point where the decision is visible can easily take years:

If you're talking about major corporations, it's going to take a couple of years at the very least. First of all they have to identify that there's an issue and it could be from the board. The board might say we‘ve got to do something so could you please investigate and let us know about what's going on with your plan.

From (that point) it'll take a minimum of six months before it's been properly articulated and we start looking into it. So six months of work, it goes to the board, it may get on the agenda or it might be delayed another three or six months. Once that's there, okay, then we've identified things, what are our alternatives? So you have another six months of discussions about what could we design? First of all is that management thinks there is no problem with the plan, so we're going to stall a little bit if we can. Just in case we're still going to go through the exercise of looking through the objectives, looking at alternative designs and then the modeling. That's another six months to a year. So we've got two years. And well by that point pensions are not really on the agenda anymore. We've got more pressing matters. Let's wait. We're now into the fourth year and there's a new director of HR and they say, you know what, maybe we should look at our plan again because we've got discrepancies between division A and division B and it's causing some new problems. In their case it's been longer than that, it's been six years. And nothing has happened. (Respondent 12)

This fiduciary decision-making requirement means that decisions are again constrained within a range of options. It is not an ―anything goes‖ mentality. In fact, the study revealed how conservative the decision-making can be, and how bound by peer- group mentality and fears of being an outlier are commonplace. Decisions must be

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prudent and must be able to stand up to all manners of scrutiny: employees, regulators, and legal challenges, to name a few. These represent the different rationalities that feed into the pension governance assemblage. Within this assemblage, rationalities compete with accounting for influence.

Take, for example, the issue of fair value accounting for pension plans framed as a rationality that must enter into the governance programme. Proponents of fair value have idealized the solutions available to firms trying to manage the fallout from its implementation. But these solutions are only available if they meet the standard notions of fiduciary process. To elaborate, the fair value approach has begun to replace the traditional actuarial framework in the areas of accounting, regulatory supervision, and valuation techniques. The actuarial approach views the pension as a long term obligation and aims for stability in contributions and funded position over time. This theorization was the primary regime in which pensions were measured, evaluated and managed for decades. Yet, the FV approach has emerged as a strong contender, and would insist upon:

1. Using the risk-free discount rates to value pension plan liabilities;

2. Avoiding asset smoothing; and

3. Avoiding long amortization periods (McRory and Bartel, 2003)

Proponents of the approach have characterized the main difference as follows:

The actuarial approach leads to a self-constructed representation of the solvency position of the pension fund without any link to financial markets. (The fair value approach) relies on methods of financial theory and techniques prevailing in the financial markets. Marking to market will inevitably lead to high volatility in the value of liabilities and assets under management. However, this

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opens up the possibility of liability-driven investment policies as assets and liabilities are being valued in an equal way. The fair value approach invites pension funds, or you may also say forces pension funds, to relate the mix specifically to their own liabilities. (Kortleve, et. al., 2006, emphasis added)

The last sentence in the above quotation is a typical standpoint from fair value proponents. The belief is that investment portfolios held by the pension funds can and should be directly linked to the liability stream of the pension obligation. The import of fair value accounting would bolster this approach. This means, in practical terms, that the assets held by a pension fund would typically consist of bond-like investments that behave in a similar pattern to the liabilities as they come due. However, this theoretical link between FV and implementation of investment strategy still needs to make its way through the governance process. As seen in the case of Commercial Co, who looked at options to match liabilities to assets, the solution is complex. To put it simply, it is just

―not that easy‖ to implement, in part due to the requirement to filter such decisions through the governance lens.

We took a look at the practicality of immunization. … It would have been a very complicated process. The annuity market wasn't big enough and indexed annuities were too expensive to really make it practical from that point. There was a bit of a sense that maybe we could just immunize this whole thing and be done with it. But we really looked into that and said, in theory, that solves your problem, the risk. You just line it all up and you go away. But practically, you can't really do that. (Respondent 6)

In sum, decisions about pension design are made within a complex institutional structure of plan governance. The structure was formed from particular legal

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characteristics that require attention and make it challenging for accounting to operate freely as an influencing feature on plan design. Characterizing this as a programme within the governmentality framework permits us to then view the entrance of other rationalities, and strategies, within the programme. This study argues that this competition, played out amongst individuals in the governance assemblage, drives outcomes and yet has been ignored in prior literature.

In the next section, a single case of a firm that undertook a defined benefit plan closure is examined through the lens of the governmentality ―programme‖ to see what we can learn about accounting‘s use, in reality and in practice.

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5. Case: Resource Co

Resource Co. is a Canadian firm operating in the natural resources industry in

Western Canada. It sponsored defined benefit pension and defined contribution plans for its salaried staff and its union, hourly-paid employees. In late 2008 liquidity became a serious issue for Resource Co, and its parent company infused $50 million in cash to keep the company ―afloat‖ during what the CFO described as that year‘s ―unprecedented world economic downturn, if you will‖.

The pension plan was identified early on as an area that could contribute to cost savings. A decision was eventually made to close the DB plan for accrued service and change to a DC plan for future service for existing members and all new employees. That decision was made as part of a series of cost containment measures in order to turn the troubled firm around. Other measures included reducing salaries by 10 percent, eliminating positions, and closing some facilities.

The case is explanatory in the sense that Scapens (2004) noted: it attempts to explain the reasons for observed practice, using the theorization to provide ―convincing explanations‖ of the practices. The objective, as Scapens noted, is to generate theory that provides good explanations of the case. The field study presented above developed a theory for how accounting works in the pension field. It will now be used to explain what happened at Resource Co.

Recall that the theorization developed from the field study implies that the pension governance programme acts like an assemblage or regime of practice in the

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governmentality sense. Accounting is seen as a rationality that must enter the programme in order to have any influence on outcomes of plan design. Entrance into the programme is dependent on it being deemed worthy of attention by at least one participant in the programme. Once within the programme, accounting then must compete with other rationalities that originate outside the assemblage and seek to inform it with their individual regimes of thought. Accounting is adjudicated against and among these other rationalities, which are grounded in notions of legality, fairness, theories around human resource management, and others. There is no limit on the rationalities that might attempt to integrate into the regime of practice of pension governance. Also, these processes of entrance into the programme, and of adjudication within the programme, are influenced by the individuals and strategies operating within it, involving social processes.

The governance programme at Resource Co involved a subcommittee of the board of directors named the Management Compensation Committee (MCC), which made recommendations to the full Board respect to the plan. Underneath the MCC operated a company pension committee composed of three HR staff, one member from finance, and one ―observer‖ member from treasury. That body performed a large portfolio of duties with respect to the plan, including analyses, administration, monitoring of service providers, and monitoring of the investment portfolio, among other tasks. The pension committee could recommend and advise the MCC, but held no decision-making authority for matters of substance.

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5.1 Accounting first enters the programme

Accounting‘s role in initiating a design change was related to ideas around expense and cash flow. The idea was that, given the search for cost savings, that a DB pension plan could be converted to a DC plan and reduce expense over time as the liability was gradually moved off the balance sheet. In addition, cash flow needs could be relieved. During 2008, one board member brought forward the idea to convert the DB pension plan to a DC plan as a potential cost saving measure. He had experience with similar conversions at other organizations. His vision was to implement the same conversion at Resource Co. At the start of the process there was no formal examination of materiality or quantification of the impact of its closure/change to DC on expense or cash flow. Instead, the rationality imported from other settings was that DB plans are expensive. Here, the pension plan was viewed as an expense that could be reduced, taking precedence over and closing off discussions of the pension plan as an HR strategy.

What emerged from the field study and this particular case is that individuals sometimes have predetermined views about defined benefit and defined contribution plans. Often, this entails a blanket view that DB plans are most costly. As one respondent put it:

I think about almost all board members, they read the paper. … They don't have a good base of knowledge, so they read the paper, there's so much media attention on risk, and oh my God, these pension plans have taken a company under. They just believe fundamentally that DB plans are bad.

This rationality and its associated discourse (that DB plans are ―bad‖, costly, and doomed for failure) was the manner in which their cost, and impact on financial results,

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was to enter into this governance programme. Now, once it appeared, it needed to conform to the peculiarities of the governance regime. A certain series of more or less formalized steps would need to be taken and the governance process would begin its work.

5.2 Accounting competes

As part of the process, the actuary provided in written form a set of general considerations about how Resource Co. could proceed with the closure of a DB plan, or conversion to a DC plan. The following letter was sent to Resource Co.

Excerpt from a letter from Actuary to Resource Co.

Steps involved and Issues to consider

1. Whether benefits would continue to increase with future salary increase or be based on frozen, current earnings. Freezing earnings would result in greater savings but come with additional negative impact on employees.

2. Discussion with the regulatory body would be required in order to obtain their approval on the approach.

3. Decide if employees close to retirement, or any other employee group, would be ―grandfathered‖ into the DB plan and continue to accrue service.

4. Decide whether to permit employees to convert their past service entitlements to a lump sum amount which would then be transferred to the ―new‖ DC plan. (This option was claimed to be costly in terms of communication and consulting fees).

5. Legal requirements for provided affected employees with reasonable notice of the changes.

6. Communicating changes to the employees, providing them with quantification of impact on their retirement savings projections, educating them about their new responsibilities, investment requirements.

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Each of the points on the list represented an alternate rationality that has infiltrated the governance programme, so the task became how to negotiate these items as a starting point. The outcome of the design decision depended on how these specific questions would be dealt with, which in turn depended upon negotiation by various interests in the governance programme. That negotiation was highly contextual, and influenced by the particular individuals and strategies adopted. That there was no common march towards a design makes sense when viewing the decision as the governmentality-based process that it is.

In each of steps 1, 3, and 4 a decision is required to adjudicate some measure of

―fairness‖ or ―generosity‖ to staff. Thus the negotiation would have to be about balancing cost savings with employee interests. In each of 2, 5 and 6 the employer is faced with legal considerations intended to provide a measure of protection to employees‘ benefits.

These are requirements that are not at the discretion of the employer for the most part. It will be shown how step 1 (decision to freeze earnings) became a site of contestation and how the negotiation of that took place in relation to the cost considerations.

The actuary then sent a report which contained estimates of cost impact for each option. The main issue was whether to freeze only service, or to also freeze the level of earnings. When only service is frozen, members cease to accrue new years of service for entitlement in the pension calculation, but their salary increases over time are factored in.

When both service and earnings are frozen, the pension is calculated based on a participant‘s salary and years of service at the date the plan closed. This is a disadvantage to the worker since salary levels typically increase.

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The actuary provided, for each case, the associated impact on cash flows

(funding) and on reported amounts (accounting). The table below shows how, in the case of freezing only service, both funding and accounting numbers are impacted but the accounting impact is nearly non-existent. Freezing earnings along with service impacts the accounting (reported) numbers because of the use of earnings in the calculation of the

Accumulated Benefit Obligation.

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Table III.1 - Cash flow and Accounting impacts of design options Cash flow impact Reported impact

Freeze Service Cash flow/contribution Negligible (Current service

requirement $370,000 less cost 0.4% per annum lower

per annum as a percentage of pay)

Freeze Earnings Negligible (company Reduce Accumulated

already making special cash Benefit Obligation by $5.7

contributions to eliminate a MM

deficit)

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At this point, we saw the emergence of the quantitative measurement of the plan design decision in terms of accounting impact. The financial impact was not large, and not quite material in the words of the CFO:

Respondent 1: Well, my materiality level is probably about, anything that was under $300,000, probably wouldn't get a whole lot of air time.

Interviewer: So something that might save you $300,000 or more in a given year, that's what you're saying?

Respondent 1: Yeah…. I was against the change because again I thought it was relatively low return for the unquantifiable impact it would have on the organization. To me it's the straw that could potentially break the camel's back for relatively low return.

Despite the minor gain, and the potential disruption on the organization, the decision to alter the plan design and convert to a DC plan was made. It wasn‘t quite material enough to warrant attention in the normal course of business, but in this case, other motivations and strategies helped the design change to become reality. Formal, quantitative metrics do not always matter as much as the research might surmise them to.

They can be overturned or ignored, depending on which rationality dominates the adjudication process at the programme level. When agents have strategies in mind, they can ignore accounting entirely if the numbers don‘t line up with the chosen strategy, or, when the numbers do line up it can be used as justification. This latter usage is similar to what one respondent categorized as an ―excuse‖:

(Accounting is) a nice excuse. A lot of employers are looking for excuses to close DB plans. A couple of years ago, it was ―oh, we have to make huge contributions.‖ Well, they conveniently forgot that for 5 or 6 years before

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they might have taken contribution holidays. ―Oh, it's a big expense‖, but they conveniently forgot that it was contribution to income (in prior years).

It also illustrates how materiality can depend on the viewpoint, and thus it is very challenging to arrive at a common measure of it. What is material, and how materiality is measured, can vary greatly depending on who in the programme is assessing it. Clearly, to the board member who initiated the closure of the plans, they are material enough to warrant closure without requiring an objective assessment of their level of materiality. He just ―knew‖ that it was. To the CFO, the savings were immaterial, and especially so given the potential negative HR implications.

5.3 Resistance transforms what can be done in the name of cost savings

A recently decided legal case emerged as a tool for staff from HR to pose some resistance to part of the design process. In that case, a firm converted its DB plan to a DC plan and froze members‘ DB final average earnings as of the date of the conversion. The regulator, whose approval was required for all design changes, refused to recognize the

DB earnings freeze, taking the position that employees were entitled to the ―non-frozen‖ final average earnings formula.

Via the governance process, the actuary brought the decision to the attention of

Resource Co. A memo informed the HR director that the case should be considered, although it was from a different legal jurisdiction. Since the actuary‘s main contact was

HR staff, they were informed directly. Without this process, they may not have had this information to be used as a tool to object to the plan design. As shown above, the earnings freeze would have a negligible cash flow impact but a larger accounting impact.

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Accounting and legal considerations thus had to be adjudicated. This opened an opportunity for human resources staff to resist, now that they were ―armed with particular regimes of practice‖ (Nealon, 2008).

Respondent 11: They originally wanted to freeze earnings as well as credited service at the end of December 2010.

Respondent 10: So we managed to talk them out of that. So your earnings at retirement is what your pension will be calculated on.

Interviewer: How did you talk them out of that?

Respondent 11: Well we had a recent law case, an earlier case that came out of Alberta where the court said you can't do that. So that helped. The interesting thing is we didn't have that decision at the time that we were talking them out of that. But we knew it was pending and as it turned out the courts in Alberta that they couldn't freeze the wages at the close of the plan. So that helped. And that helped a little bit in terms of what the pension looked like at the end of the day too.

Respondent 10:- That's right. We asked all kinds of questions (of the actuaries). How can we mitigate the loss for employees and things like that but the bottom line is, and really it was just giving you the tools of resistance to go back, you know, we don't want to freeze earnings at the end of the year, we should really consider the financial loss or hardship to the members or employees.

Respondent 11: The only way we were really able to push back on was this idea of calculating your pension entitlement as of the December 31, 2010. That's the only one we were able to push back and have any success at. Your pension would be based on your best five, that was the only push back. And that was a recommendation that came from (the actuary). When we asked the question about freezing earnings this year, he said, I don't know if you can do or want to do that.

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In the final outcome, HR successfully stopped the proposal to freeze earnings, and the plan design froze only service. In summary, the case has illustrated the main points brought out from a theorization of the use of accounting in pension plan design that is grounded in governmentality. According to the theory proposed, accounting needs a

―way in‖ to the governance programme, where it is then faced with counter-rationalities.

These rationalities are used by individual agents in the programme to put forward certain viewpoints or strategies. Thus, the model is able to account for both an economic usage of accounting data and a broader usage, which acknowledges that accounting and cost data can sometimes be resisted, ignored or used as an excuse. Accounting certainly played a part in highlighting the pension plan as an expense, but how great that expense was became known after it had already been viewed, based upon other rationalities and discourses and prior experiences, as non-viable. The accounting and cost impacts had to be considered in light of other ideas that originated from other regimes of truth: in this case, fairness to long-serving employees and legal risks (regulatory and potential litigation). All of this shows an active role for accounting, but not as a causal factor that can be modeled easily as an independent variable affecting outcome.

6. Conclusion

This study has asked how, rather than why, plan design decisions are made. It has not characterized accounting as an influencing variable, but rather has let accounting play whatever role it took on during the process of entering and being used and analysed within the governance process. Its main emphasis has been to develop a framework of

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how this works: via the process of accounting focusing attention on the plan, and then having to compete with other rationalities once it enters.

In summary, and to further elaborate, based on the governmentality framework this study characterizes the pension governance structure as a regime of practice with its aim to manage and oversee the pension governance programme. In this framework, knowledges populate practices with the truths and language of rationalities. ―Deliberate and relatively systematic forms of thought‖ (Dean, 1999), attempt to shape the practices.

Here, the pension governance programme has been informed by several truths including accounting. Accounting, though, shares space with legal notions, regulatory requirements, ideas about what is ―right‖ in terms of employment structures, and ideas about how to manage risk. Thus, it is one rationality among others attempting to shape outcomes and inform what happens in the governance structure.

Once accounting enters the regime, it competes with those other rationalities. The outcomes, including design, depend on how that negotiation takes place. A model that tries to place accounting into a tightly constrained role (e.g. an independent variable), inadequately characterizes how accounting works in this setting. Instead, the lens employed here has shown that accounting can function as a rationality or as a technique, as a strategy or as something to be ignored. It rarely is inconsequential, even when it is deemed to be ―immaterial‖ from an objective, metric-oriented perspective.

Moving from this theorization, the individual case study of a design change illustrated these points. It showed how accounting entered the programme, and how once it was represented by actuarially provided cost estimates, it was then adjudicated amongst a list

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of competing ideas. Amongst those ideas were legal considerations that were picked up and used as a tool for resistance by the HR staff who were trying to mitigate the effects of the design change on employees.

At a minimum, the study highlights additional variables that have not yet been studied in any formal way, and yet have strong influences on outcomes. But this was not its intention, since that would reduce the ideas found here to static, empirically measurable observations, and that would again miss out on the complexity of their use as strategies or rationalities. The study showed how the process of negotiating depends highly on context-specific variables: whether certain individuals pursue particular strategies, and whether certain rationalities come to dominate. It did so by revealing the reality of the constraints and opportunities provided by the governance programme. As a programme developed to manage pension risk and oversee pension benefits for plan beneficiaries within a very specific legal framework, it sits in the middle of, and plays a mediating role between, information and the firm‘s final ―decision‖. Indeed, the study shows that that these decisions are not truly those of ―the firm‖, rather they are the end result of a negotiated process involving a complex assemblage attempting to make sense of competing rationalities that at times conflict and at other times support one another.

It is hoped that this study can contribute to the current research that attempts to investigate how accounting plays a role in plan design. As noted, the design and delivery of industrial and public pension plans plays an important role as a piece of the overall social security net. The degree that accounting impacts the pension institution is important not only to accounting researchers and practitioners, but also to human

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resources, labour relations, and social security experts, carrying with it broader public policy impacts. More specifically, the study is a contribution to the literature that has aimed to characterize accounting‘s role as a measurable, independent variable with causal impact. It may provide some insights into why consistent results are lacking. It is hoped that this study has shown accounting‘s role in plan design, yet also shown that this role is not a simple one, and that it can be understood well by viewing it from a governmentality perspective in which the programme of plan governance is the key regime of practice through which accounting‘s impact is filtered. In viewing it this way, it is possible to see how strategies take hold and how accounting therefore is not easily modeled, since its use is not necessarily what one might expect from an economically rational decision-making perspective. Indeed, it can be used politically and strategically, and as a result can be dismissed or ignored, or used as an excuse, all to activate certain tactics that stem from other rationalities.

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APPENDIX A - CHILE: TIMELINE OF EVENTS

September 4, 1970 Unidad Popular (―UP‖) (Popular Unity) candidate Salvador Allende wins 36% of the vote in the presidential election, defeating National Party (―NP‖) candidate Alessandri (35%) and Christian Democrat (―CD‖) Tomic (28%). October 24 is date scheduled for runoff vote between Allende and Alessandri. September through US government, via President Nixon and Henry Kissinger, direct October 1970 CIA to attempt various means to subvert the October 24 election results. The United States is concerned with the first democratically elected Marxist government, believing this might lead to a more effective anti-US stance in Latin America than a revolutionary-led Castro government. October 24, 1970 Chilean Congress votes 153 to 35 in favour of Allende. December 1970 Numerous private industries are nationalized, including banking, through 1971 mining, and telecommunications. Nationalization includes outright confiscation by workers or government without legal means to do so. 1971 UP and CD relationship sours 1971 through 1973 Generally recognized rights of private citizens and specific function of the police were ignored, including takeovers of private property and failure of administrative authorities to comply with rule of law regarding restitution. December 1, 1971 March of the Empty Pots: 5,000 women protest food shortages and the visit by Fidel Castro to Chile. August 21, 1972 State of emergency in Santiago as violence grows out of a one-day shopkeeper strike January 1973 Inflation reaches 200 percent May 10, 1973 Three week copper strike results in state of emergency June 20, 1973 Physicians, teachers and students strike to protest Allende‘s handling of copper strike. The following day, government supporters (Workers Confederation) organize a counter strike. June 21, 1973 Violence erupts, including gunfire, bombing and fighting as pro and anti-government strikers clash. June 29, 1973 A modest military coup is attempted and aborted, under Colonel Roberto Souper July 26, 1973 Truckers strike throughout Chile August 2, 1973 Owners of more than 110,000 buses and taxis strike August 8, 1973 The new cabinet (the four military and police chiefs) is established. This would become the body taking military rule as the junta later on.

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August 23, 1973 General Augusto Pinochet Ugarte is named army commander after General Carlos Prats resigns due to conflict and split within the military. 1973 Civilians were insistently calling upon armed forces and security forces to intervene. September 11, Chilean military overthrows the government. The presidential 1973 residence is surrounded with tanks, armoured cars, air fighters. Allende dies in the ensuing battle. September 13, Augusto Pinochet is named as president. The idea of a presidency 1973 of the junta rotating between the commanders-in-chief was dropped. Commander-in-chief of the army became head of the junta. He was given the title of Supreme Head of the Nation. Actually however, what emerged was a new institution endowed with powers unprecedented in Chile: the President of the Republic/Commander-in-chief. The person holding this position not only ruled and administered the country but also presided over the government junta, and hence without him no laws could be passed nor could the constitution be amended; he also commanded the entire army. September through Popular Unity parties were disbanded immediately and all others October 1973 were suspended. In 1977 this suspension also turned into a dissolution. September through Military regime struggles with internal conflict as the new role is December 1973 undefined. Included in this is the conflict related to how long the military regime should remain in place. Some viewed the intervention as a short term solution, others thought long term. June, 1974 The DINA is created. The junta concluded that a state intelligence agency had to be created to aid it in this process and to combat what were perceived to be the existence of political forces that had been defeated but which had the potential to reorganize both underground and outside Chile. 1973 - 1985 2,279 citizens are killed (primarily under DINA control) under human rights violations and political violence. Violations include torture, execution, and forced disappearances. 1976 The downfall of the DINA began with the murder of Orlando Letelier (ambassador to the US under Allende government) in 1976 in Washington, D.C. The US government sought extradition of DINA leaders, leading to top junta leaders to comprehend the power of the group. The DINA was dissolved and replaced by the CNI (National Center for Information) which was put under the supervision of a top army officer who had opposed the DINA group. The group never returned to what it had been. July 24, 1978 Gustavo Leigh is removed from junta; Air Force generals resign in

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protest August 10, 1980 New constitution calls for plebiscite on return to civilian rule in 1988 1988 Plebiscite held; Pinochet loses (55% to 43%) and is surprised with result. December 15, Opposition alliance, representing Left and Centre, wins the 1989 country‘s first general elections in 19 years. Patricio Alwyn (55%), Hernan Buchi (29%), Francisco Javier Errazuria (14%). March 11, 1990 Pinochet‘s last day in office. 1997 Pinochet retires from Army command and becomes Senator for Life, which had been guaranteed to him in the 1980 constitution. October 16, 1998 Pinochet arrested in Great Britain for human rights violations. Sent to Chile on compassionate grounds after illness, but judges in France, Belgium and Switzerland began extradition requests. Returning home, he was stripped of his parliamentary immunity and proceedings against him went ahead. Investigations for tax evasion, passport falsification, fraud were added to the murder and torture charges. December 10, Pinochet dies at age 91. 2006

Sources: Aguilera and Fredes (2003), Coad (2006), MIT OpenCourseWare (2002), Report of the Chilean National Commission on Truth and Reconciliation (1993).