GLOBAL - The International Accounting Standards Board (IASB) today voted to not move forward with plans to eliminate the use of government bonds to determine discount rates.
In its recommendation to the board, IASB staff said feedback from pension experts and scheme managers showed the plan to replace the use of government bonds with a hypothetical corporate bond spread was more complicated and costly than originally thought.
Staff also advised against making the changes ahead of a broader review of the employee benefits under IAS 19.
IAS 19 currently requires companies to use the value of high quality corporate bonds to calculate the rate used to discount employees benefits. In countries where there is no deep corporate bond market - like India, Turkey and South Africa, for example - plan sponsors must use the yield on government bonds instead.
Removing the use of government bonds was meant to create an even playing field between schemes in the UK, US and the Euro-zone, whose deficits have decreased with the rise in corporate bond yields, and those in other countries.
In August, the IASB requested comments on the proposed change. The Board said it received 100 comment letters, but the responses were "polarised."
Staff wrote: "While a majority of respondents from Europe, North America and International organisations supported the amendment, the majority from the Asia-Pacific Region (including Australia and New Zealand) and emerging markets did not support the amendment. The level of support appears to depend on the proximity of the respondent to a deep corporate bond market."
Punter Southall principal Peter Black said one problem with the proposal was a lack of clarity about exactly what proxy would replace government bonds. "The respondents felt it wasn't clear what that would involve," he said.
Lane Clark & Peacock partner Colin Haines said: "The changes could have had a big impact in many countries, and it is essential that any amendment to IAS19 is workable around the world. As it happens, the proposed sticking plaster had a number of holes."
Despite the holes, he said IASB's decision will disappoint plan sponsors in some European countries.
He said: "Companies in countries like Sweden and Norway will be disappointed that these changes have not been approved - for these companies, the proposed amendments, if they had been agreed, could have resulted in reported pension liabilities falling by tens or, in some cases, hundreds of millions of euros."
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