Accounting Measures Poised to Raise Pension Liabilities

Just when corporations were getting over Quantitative Easing, accounting measures could be about to raise liabilities again.

(November 19, 2012) -- Moves by the International Accounting Standards Board (IASB) to enforce a clause on how to account for employee contributions could see pension obligations on company balance sheets - already strained by Quantitative Easing (QE) - rise further, consultants have warned.

A revised version of the IAS19 could potentially add to the obligations of defined benefit (DB) pension schemes that are partially funded by employee contributions.

Simon Robinson, principal consultant at Aon Hewitt, said: "IAS19 has a concept of 'uniform attribution'. This means that where later years of service would give rise to a higher benefit, this must be smoothed such that an equal amount of benefit is attributed to each year of service. A good example might be a plan which provides no benefit based on the first 19 years of service but provides a benefit in the 20th year of €20,000. For IAS 19 purposes, a benefit of €1,000 would be attributed to each year of service so that the company's liability builds up slowly over time."

He added: "So far, so good. The difficulty arises when employee contributions are considered. The revised IAS 19 says to attribute employee contributions as a negative benefit. It is then the net benefit (i.e. the share for which the employer is responsible) which must be uniformly attributed."

Robinson expanded on the above example, noting that a benefit accrual of €1,000 per year is uniform - i.e. it doesn't increase in later years of service. However, if the employees paid €100 per year towards this benefit, the net benefit (i.e. the share paid by the employer) is now weighted towards later years of service and so needs to be uniformly attributed. This is because an employee contribution of €100 in year one funds a larger part of the total €1,000 benefit for that year than an employee contribution of €100 in year two, according to Robinson. The contribution in year two funds a larger part of the benefit than a contribution of €100 in year three, and so on. So the net benefit funded by the employer increases over time as the employee's share of the cost decreases proportionately.

This move would drive up pension liabilities for companies already struggling with rising obligations due to falling government bond yields in developed markets.  

Most DB pension funds in Europe are partially funded by the beneficiary, whereas in the United States it is rare for staff to help pay for their retirement benefits.

Investment consultants and actuaries have told aiCIO that across Europe there has been confusion over what this could mean for corporations, which have so far broadly ignored the measure.

It seems more than likely, however, that liabilities will not go down should the clause be enforced. 

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