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Category: Pension benefits

Change to global accounting standard threatens quality pension schemes, warn ITUC & TUAC

Posted: September 17, 2010   By: Pierre Habbard Category: Pension benefits,

 As part of a public consultation by the International Accounting Standards Board (IASB) on its proposal to revise IAS 19 – the global accounting standard for measuring pension liabilities under defined benefit (DB) schemes on the companies’ balance sheet – ITUC and the TUAC called for the IASB to maintain the right for companies to “smooth” their pension liabilities gains and losses over several years in recognition of the long-term nature of pension financing. The IASB proposes to remove this option and enforce “immediate recognition” at “fair value” of all changes in pension obligations when they occur.

“If enacted”, the ITUC and the TUAC warn, the IASB proposal “will encourage employers to shift from DB to defined contribution (DC) based on an inaccurate, volatile and inflated measurement of net defined benefit liability”. Yet DB schemes are far superior to DC schemes. They protect workers against market and longevity risks – risks that do not place any additional burden on employers or on taxpayers if they are properly managed. “Rather than contributing to a transparent and fair discussion on pension design”, reads the ITUC and TUAC submission to the IASB, “it would produce the opposite result: fuelling un-founded fears and risk aversion against DB schemes and pushing management into short-termist behaviour”.

Trade union concerns are shared by employer groups as seen in the submission by the Business and Industry Advisory Committee to the OECD. International organisations appear to be divided on the issue however. While the World Bank applauds the proposal to remove the corridor, the OECD is ambivalent: immediate recognition “has been a heavily debated topic” for which there are “strong arguments both for and against”. Yet the OECD stresses that “the long-term nature of defined benefit pension promises should be taken into account when valuing liabilities Importantly, the OECD hints at double-standard treatment by the IASB as elements of smoothing are allowed in other aspects of corporate accounting, E.g IAS39 on financial liabilities. Indeed while the IASB would want to force immediate recognitation of pension liability gains/losses, it would still allow for smoothing of other financial liabilities.

The ITUC and TUAC also question the IASB’s confidence in applying the market-based “fair valuation” method to measuring pension obligations. Unlike other financial liabilities, pension liabilities are not traded on markets and hence no reliable market-based indicator exists to this end. On the contrary, measurement of pension obligations is largely dependent on a broad range of assumptions including the rather arbitrary choice of the “discount rate” (typically the benchmark rate set by the central banks or long term corporate bonds).

Although other proposals contained in the IASB draft are to be welcomed, including enhancing disclosure requirements concerning the pension plan’s characteristics, the ITUC and the TUAC warn against the unintended consequences of the proposals. They call on the IASB to maintain the ‘corridor’ approach which allows companies to amortise and smooth pension liabilities gains and losses and to condition any further consideration of this topic on the implementation of large-scale impact studies.

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OECD lessons from the crisis: Second thoughts about DCs and pension surpluses?

Posted: August 30, 2010   By: Pierre Habbard Category: Pension benefits,

A new OECD pension working paper on the lessons from the crisis was published end of July: Defined benefit pension schemes and counter-cyclical pension funding regulations. The paper covers a…

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