GLOBAL - Career-average defined-benefit pension plans face substantial upheaval if the International Accounting Standards Board implements its new proposed definition of contribution-based pension plans, two leading pensions consultants have warned.
The IASB plans, unveiled today, could see the accounting standard setter introduce a new plan classification, labelled as contribution-based pension promises.
IASB member Stephen Cooper today explained during a webcast presentation so-called CB plans "includes existing DC plans plus some promises currently classified as DB, such as cash-balance plans.
"One of the consequences of this classification is that the existing career-average plans would be within the contribution-based category classification," Cooper added.
The board has also reached a preliminary viewsuggesting sponsors should measure liabilities on CB plans at fair value - on the assumption that the benefit promise remains constant. It also wants to see all gains and losses on CB plans recognised in profit or loss.
Interested parties have until 26 September 2008 to submit comments on the proposals to the IASB.
But giving his reaction to the proposals today, Phil Turner, a principal with consultants Mercer, told IPE: "It's a very welcome change for countries such as Belgium and Switzerland where they are having to value those plans as defined benefit in the absence of sufficient information to do so reliably."
But, he warned, sponsors face real difficulties if IASB goes ahead with its proposal to measure liabilities for pensioners according to the plan's classification in the benefit-accumulation phase.
"What the IASB has done by developing a new measurement attribute for a sub-set of existing DB plans is float the notion that two people with identical benefits can be measured differently solely because of the way the benefit accrued," Turner told IPE.
"We very much share those concerns," Watson Wyatt's Eric Steedman added. "Of all the things that stand out here, it's the potential difference between a career-average and a final-salary plan, which are economically very similar, that strikes me."
Steedman also noted: "The IASB has proposed different valuations. That looks even stranger when the benefits are already in payment."
These proposals also leave plans - certainly many in the UK - facing a real administrative dilemma. according to consultants.
"To value a pension you can get away with having some fairly rudimentary information," said Turner.
"The changes that the IASB has mooted in the discussion paper mean that plan sponsors will now need to look at how the benefit in payment was arrived at and ask themselves 'was it contribution-based or final salary?
He continued: "There is no current requirement for a plan to keep a record of this information at the moment. And record keeping can be affected by both benefit renegotiations and corporate takeovers."
Asked by IPE to estimate the scale of the problem, Turner said: "I think the problem is potentially significant, in the UK at least, because a lot of plans have switched from 'pure' DB some some form of career-average plan."
Stephen Cooper told his audience although the discussion paper does not expressly address the question of disclosures, the board "will wish to cover [this] at the exposure draft stage".
Neither multi-employer nor employee healthcare benefits plans are affected by the proposals in this discussion paper.
Any final accounting resulting from this Phase I project will take effect from 1 January 2013.
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