IAS 19: Penalising changes ahead

The immediate recognition of the volatility of pension surpluses and deficits in the profit and loss accounts of the sponsor may lead pension funds to shed risky assets.

Author(s):

Samuel Sender

Applied Research Manager at the EDHEC Risk and Asset Management Research Centre.

Financial reporting standards for pension funds are of great topical interest. The current crisis points to the need for clearer regulations, both accounting and prudential, and for regulations that provide better incentives for pension funds to manage risk and to contribute to a more stable pension system. Poorly designed regulations will lead to the closure of defined-benefit pension plans. The International Accounting Standards Board (IASB) has proposed a revision of IAS 19. In the current paper we show that the immediate recognition of the volatility of pension surpluses and deficits in the profit and loss accounts of the sponsor may lead pension funds to shed risky assets. This proposal gives pension funds no incentives to manage risk properly; instead, by suggesting that pension assets and liabilities can be considered held for trading, pension funds are given incentives to shed these liabilities. We firmly warn the IASB against the temptation to suppress the corridor approach, as this would lead to a significant reduction of holdings of risky assets in pension funds. In addition, we support smoothing market yields as a way to filter out market noise. We also support the amortisation of pension surpluses and deficits, in a manner consistent with the general treatment of long-term assets and liabilities. Finally, we recommend that pension funds use the projected benefit obligation to compute pension cost but that they report the accrued benefit as the pension liability in their balance sheet, a measure that would then be consistent with the prudential measure of pension liabilities. This study was produced by EDHEC-Risk as part of the AXA Investment Managers Regulation and Institutional Investment' research chair.

Type: Position paper
Date: le 12/10/2009
Research Cluster : Finance

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