Brussels' reactions to the International Accounting Standards Board's (IASB) focus on accounting for pension funds include a warning from EU lawmaker John Purvis: "Beware the elephant trap." The European People's Party and European Democrats representative uses the expression to support the IASB's wish to do away with the company practice of deferring the booking of losses that result from cyclical falls in asset values.

The vice-chairman of the European Parliament's economic and monetary affairs committee notes that the elephant caught in the pit tries dig its way out. But the more frantically it delves, the deeper down it goes.

Likewise, a company taking advantage of holding back recognition of a liability faces the danger of reaching an "overhang that is un-rectifiable". Hence, Purvis tells IPE, even though the liability may not be realisable for perhaps 20 years ahead, and volatility does have to be considered, "I should have thought that the lesser of two evils is to value to market regularly". 

Shareholders, Purvis adds, need to know if a company is hiding a long-term liability, or if it is sitting on a surplus due to over funding. He says that while the European Parliament has not given much attention to proposed upgrades to IAS19 pension provisions, he believes that the other political parties hold similar views.

UK liberal group MEP Sharon Bowles draws a comparison with the debate on whether to bring pension funds into Solvency ll and takes the elephant analogy further. She warns that, if care is not taken, there could be an elephant graveyard of occupational pensions. 

Bowles, who is also on the Parliaments' committee on economic and monetary affairs, highlights the challenge posed by the wide variation in pension norms across the EU. For instance, in France most occupational pensions are run through life insurance. In the Netherlands, the UK and Ireland, pension funds are held in trusts or independent foundations and are subject to the occupational retirement provisions directive.

Reaction from the European Federation for Retirement Provision (EFRP) on the proposed accountancy regulations includes comments from Ray Martin, chairman of its working group on accounting. The director of UK pensions at DHL sees a parallel with pressure from the US's Financial Accounting Standards Board to crack down on lax interpretations of FAS87, the US equivalent of IAS19, on expected returns.

However, the EFRP believes expected returns should continue to be included in financial statements. It suggests that "better disclosure of how expected returns are derived is a more appropriate solution".

It also points out that the current AA corporate bond rate is appropriate for pension liabilities, as they do carry some risk. Martin says that the future cannot be certain. "When pensions come due, recipients could be married, or un-married, or have other significantly changed circumstances with a bearing on pensions."

The federation also holds that future discretional salary increases should no longer be included in the measurement of pension liabilities for current employees. Martin justifies this stance, saying that a firm should reflect the situation today.

The EFRP also says that employers in industry-wide plans - such as in the Netherlands - where risks are shared, should continue to be exempt from the pension accounting standard.

It further states that pension funds need not include in their own accounts the liabilities on the same basis as the sponsoring employers. "A company's normal accounts are for reading by investors deciding whether to invest today, while the pensions accounts concern pensions due in a long time, so there is a difference," Martin says.

One input to the IASB's discussion paper is from ratings agency Fitch. It asks for transparency, consistency of accounting treatment, consistency of computation, and disclosure of current, comparative and agreed future cash contribution to pension schemes.

On transparency, Fitch points out that operational characteristics and risk profiles of the core business of most of the entities it rates vary considerably from those associated with pension schemes. On consistency of accounting treatment, it advocates a limit on the options available to entities when accounting for pensions.