GLOBAL - Here it is. Global Pensions' summary of what changes to accounting standard IAS19 could mean for both sponsoring employers and pension schemes.
The two main changes are as follow:
1. Scrapping of the use of expected return on assets
Under international accounting rules, companies can currently record a "profit" each year equal to the expected, rather than actual, return on pension scheme investments.
With pension schemes traditionally invested in riskier assets such as equities, this has often meant firms can use this to credit "magic money" to company profits.
The change to IAS19 will replace this expected return credit with a objective credit based on the AA corporate bond yield used to discount the liabilities, which under current market conditions is on average around 1% lower than expected asset returns.
As a result of this, most UK companies will now see an increase to their income statement charge for pensions - as the typical investment strategy of pension plans targets a return higher than the discount rate.
However, the changes could also be a trigger for companies to de-risk the investment strategy of pension schemes - as it removes one of the incentives for taking risks.
The current rules rewarded companies for taking greater risk with pension plan investments regardless of the actual return achieved.
2. Abolition of corridor accounting options
The IAS19 revision will also require immediate recognition of all gains and losses arising in defined benefit plans.
At present IAS19 permits use of the so-called "corridor" method, under which the actuarial gains and losses arising on post-employment benefits such as pensions can be deferred and recognised in net income in later periods.
They now would be recognised in full, but as part of other comprehensive income - i.e., outside net income.
Actuarial gains and losses can vary significantly from period to period as they include not only changes in estimates regarding employee turnover and life expectancy but also investment gains and losses and the impact of changes in discount rates.
Thanks to Aon Hewitt, Mercer, LCP, KPMG and PwC for the information used to compile this article.
The People's Pension, Atlas Master Trust and The Cheviot Trust have been granted authorisation from The Pensions Regulator (TPR), taking the total number of authorised master trusts to 18.
Pension schemes have been warned they may now face a more challenging legal test if they wish to fix drafting errors.
The Greene King Pension Scheme has appointed XPS Pensions as its actuarial and investment adviser following a competitive tender process.
Professional Pensions has compiled a list charting the progress of master trust authorisation. View our list in full here...