GLOBAL - Pension funds will continue to shift away from equities to bonds as a result of the latest changes to International Accounting Standards, Mercer says.
The consultant said the changes to IAS19 - announced yesterday - will prompt companies to review their pension allocations and investors to review the effect of pension risks on companies.
It added the rules, which come into effect from 2013, would encourage companies to change the way billions of dollars of pension fund money is invested.
Mercer global accounting standards group principal Warren Singer said: "Pension plan investments in equities will no longer directly lead to increased reported company profits, even if equities produce superior asset returns over the long term in line with consensus forecasts."
The firm said the changes will boost the trend of many companies reviewing whether taking risk in schemes creates shareholder value. It added moving out of equities into bonds tends to lead to more stable key performance indicators.
"Overall, this accounting change is likely to encourage better risk management from pension plan sponsors," Singer said.
The amended accounting standard were introduced to make financial statements clearer on the costs and risks associated with schemes, and it make it easier to compare the impact of pension costs on reported profits between companies.
Mercer said the revised IAS19 would transform the way pension plans are treated in many companies' financial statements.
It explained while a scheme is still separate from its sponsor, a plan's liabilities and asset performance are reflected in the company's financial results. At present there are options as to how this is presented.
Mercer said "careful scrutiny of the footnote disclosures is required at present to understand the different treatments".
The new IAS19 rules will require the same treatment of pension plans in all cases - a change for many companies around the world.
The consultant said it would prevent companies using scheme investments as a vehicle to enhance their company's reported earnings. It added it would also ensure focus returns to addressing the "myriad of risks" facing schemes.
Deloitte said the changes would get rid of the use of "smoothing" as a way of allowing companies to reduce volatility in the published figures, and which could make their pension deficit look more manageable. The new, revised, IAS 19, bans the ‘corridor method' which allowed companies to do this.
Veronica Poole, head of the Deloitte Global IFRS leadership team, said: "The loss of the ability to ‘smooth' the effect of pensions on a company's accounts will mean more transparency and comparability, though it will also have a big impact in countries, particularly in continental Europe, where use of the corridor is a much more common practice. In future companies' balance sheets will show their pensions surpluses or deficits much more accurately."
The new rules will still allow companies to decide where they allocate their pension costs in the profit and loss account, but will be more specific about what hits net income and what hits Other Comprehensive Income, (OCI). This will make the figures simpler and more easily understood, Poole added.
KPMG pensions partner Mike Smedley said: "The changes are overall broadly welcome from a financial reporting perspective, although some companies may feel that the P&L charge will now overstate the real cost of pensions, particularly where the scheme is delivering strong asset returns.
"From a pension scheme governance point of view, the change to the expected return on assets removes one of the incentives to invest in higher yielding asset classes, so may lead to some reconsideration of investment strategy, whilst the disclosure of scheme expenses may lead CFOs to question why their running costs are higher than for seemingly comparable businesses."
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