UK - Companies entering a longevity swap could get a "nasty surprise" if they do not consider the effect on their accounting position, Hewitt Associates warned.
Head of longevity and risk solutions Martin Bird said because longevity swaps were a new market, accounting standards do not specifically prescribe how to deal with them.
And Bird said an extra year of life expectancy could add 3% or 4% to the accounting liabilities a company had to disclose.
He said trustees usually adopt a prudent assumption in the context of funding the scheme, whereas for reporting purposes sponsors need to look at statutory accounting, such as IAS19.
He explained trustees that might assume a 60-year-old male will live to 88, whereas companies might assume 86 or 87 for accounting purposes.
This extra one or two years of life expectancy has to be recognised, so when it comes to accounting for a longevity swap those extra years sit as a deficit on the balance sheet.
Bird said: "If you have to recognise that difference on your balance sheet it could come as a nasty surprise."
PricewaterhouseCoopers pensions partner Brian Peters said a longevity swap was like removing risk without paying cash - so it should not surprise people the cost is similar to a real buyout in terms of balance sheet liabilities.
He said: "It is treated like an investment so most of the impact is not reflected in the profit and loss account but a swap can prevent a much worse IAS19 deficit than before you did it."
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As a hectic 2018 draws to an end, Jonathan Stapleton wishes readers a quieter 2019.