‘Preliminary Views on Amendments to IAS 19 Employee Benefits’ Radical proposals for pensions accounting are premature
The launch of the International Accounting Standards Board (IASB)’s Discussion Paper last March was overshadowed by an earlier Discussion Paper on pensions accounting from the Accounting Standards Board (ASB). The IASB’s Discussion Paper does not include proposals on the discount rate to be used to discount scheme liabilities that proved so controversial in the case of the ASB’s Discussion Paper, but its proposals are important and could be seen as more urgent than the ASB’s. While the ASB’s Discussion Paper was intended to provoke debate and will lead to recommendations to the IASB, the IASB’s consultation is the first step towards a new accounting standard, expected to be issued in 2011, to amend the International Accounting Standard on employee benefits (IAS 19).
The IASB’s Discussion Paper covers the first stage of its review of pensions accounting and is presented as tidying up problems in pensions accounting that cannot wait the more thorough review of pensions accounting that the IASB is undertaking with the US accounting standards setter, FASB. Its proposals are more radical than one would expect from an interim review and to some extent appear to pre-empt the results of the later review.
The Discussion Paper proposes the
immediate recognition of all gains and losses
arising from Defined Benefit plans, eliminating
the recognition options currently permitted
by IAS 19. It further proposes that actual
returns (both income and capital), rather than
expected returns, should be put through the
income statement and seeks views on this
should be done, including the possibility of
putting these gains and losses through the
profit and loss account (the other approaches
that the Discussion Paper considers would
take valuation gains and losses through ‘other
comprehensive income’). It also proposes the
definition of a new category of ‘contribution
based’ (CB) pension promises, which would
cover pension schemes other than final salary
ones, and how to account for them.
The IASB’s proposals have worrying
implications for pension provision. The
volatility resulting from immediate
recognition of all gains and losses and
from taking them through the income
statement would fur ther undermine
Finance Directors’ and company boards’
willingness to continue to provide good
quality DB pensions for their staff that are
in fact perfectly affordable. The proposal
for a new category of ‘contribution based’
pension promises would have far-reaching
consequences for schemes in a number of
European countries. In the UK they would
reduce the attraction to employers of intermediate schemes (for example, career
average schemes) that would reduce their
pension risk without passing it on in its
entirety to employees.
The NAPF believes that the proposals are premature and do not address issues that require urgent action, and that no action should be taken on them until after the IASB’s full review of accounting for postemployment benefits. Specifically, we argue in our response to the consultation that:
any decision on whether to remove the options for deferral of actuarial gains and losses should not be taken until after a revised standard on financial statement presentation has been developed;
valuation changes arising from immediate recognition must not be taken through the profit and loss account; and
the proposals on ‘contribution-based’ promises represent a fundamental change in pensions accounting and are out of scope in an interim amending standard.
Julian Le Fanu is a Policy Advisor, Investment Regulation and Funding at the National Association of Pension Funds.
Pensions World, 12th September 2008 Transaction costs still need watching
Dealing commissions and other transactions costs can be a considerable drag on investment performance. They have fallen since the introduction by the Financial Services Authority (FSA) of new Rules and Guidance on 1st January 2006 that required investment managers to provide clients with regular reports on their use of their clients’ dealing commissions. The FSA’s regulatory approach is based on periodic disclosure by fund managers and brokers to pension schemes of the dealing costs incurred on their behalf and prior disclosure of their more general policies on transaction costs along the lines of (for example) the IMA Pension Fund Disclosure Code, jointly developed by the Investment Management Association (IMA) and the National Association of Pensions Funds (NAPF) in 2002.
Falls in transaction costs should not be seen as a cause for complacency. Pension schemes and their advisers need to continue to monitor their transaction costs. The FSA has recently reappointed Oxera, an independent economic consultancy firm, to follow up its earlier work on transaction costs and check that earlier gains have been extended or at least maintained.
Julian Le Fanu is a Policy Advisor, Investment Regulation and Funding at the National Association of Pension Funds.
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