Yesterday, the International Accounting Standards Board (IASB) confirmed the much-trailed changes to accounting for pension benefits in accordance with IAS 19. The changes will be effective for accounting years commencing 1 January 2013, though earlier adoption is encouraged.
IAS 19 applies to all UK (and EU) listed Companies, though can be adopted by non-listed companies. The main UK pension accounting standards, FRS 17, is effectively being replaced from 2012, so these changes will generally also affect non-listed companies.
The main changes are as follows:
- The replacement of the expected return on assets element of the profit and loss charge by a credit linked to the discount rate used to measure the liabilities. Therefore given that an interest charge already applies to the liabilities, the final result on the P&L account will effectively be an interest charge (credit) on the plan deficit (surplus); and
- Companies which partially recognise actuarial “experience” in the profit and loss account will either need to fully recognise year on year experience or alter the accounting method to recognise experience gains and losses via the Statement of Recognised Gains and Losses (STRGL).
Further disclosures will also be required in relation to the characteristics of defined benefit plans and the risks which plan sponsors are exposed to by operating these plans.
So, what does this mean?
The main conclusion is that, all else being equal, Company profits will be reduced. It has recently been estimated that the replacement of the expected return credit could reduce UK Company profits by £10 billion per annum.
Where full recognition of actuarial experience is adopted, the profits or losses arising from defined benefit pension schemes will be significantly more volatile.
It has also been argued that the changes will lead to a move away from equity investments by defined benefit pension schemes as holding equities is no longer “rewarded” on the P&L.
However, many within the pensions industry often over-dramatise the attention paid to disclosed pension accounting figures in the profit and loss account. I agree with the views that most analysts already set-aside any windfalls on the P&L associated with the pension scheme, particularly when brought about by the current expected return on assets credit.
It will interesting to see if the changes do hasten a move away from equity investment by schemes. There is already a trend to de-risk and I see this continuing, but doubt whether the major driver will be these accounting changes. More likely, it will driven by trustees and employers who are less willing to be exposed to the risk of volatile funding levels and greater uncertainty in future funding costs.