IAS 19 proposals would drive down risk appetite – Towers Watson
GERMANY - Proposed changes to IAS 19 pension accounting standards could leave German schemes more risk-averse and increase the implicit costs for insolvency protection PSV, a leading consultant has warned.
One of the proposed changes set out by the International Accounting Standards Board (IASB) would see companies immediately accounting for changes in the valuation of their pension assets, scrapping the so-called corridor method which allowed market fluctuations to be disregarded up to a point. Only the actual return on assets, not future expected returns, would be permitted for the calculation of pension liabilities and assets. (see earlier IPE-story: IASB amendments sensible, say pension consultants)
But Alfred Gohdes, head of actuarial consulting at Towers Watson in Frankfurt, complained that, as a result of these changes, expectations of higher returns from more risky investments held by pension funds would no longer have a positive effect on profit and loss statements. Consequently, he said, "this could lead to less risky and more conservative investment strategies."
Another issue for Towers Watson is the IASB's suggestion that "future administration costs" should be factored into the pension benefits and liabilities. The consultancy noted that it is as yet unclear which costs will fall into this category, warning that payments made to the pension insolvency vehicle PSV could be applicable.
"Should the estimated future administration costs have to be included in calculating the defined benefit obligation [DBO] and no longer in the continuous expenses, the DBO and the time going into it could be increased by several percent," the consultancy said.
Overall, the proposals would mean "significant changes" to the accounting of German companies, Gohdes said. While some changes would mean more transparency and overall better calculability, others might lead to more volatility in plan assets, higher liabilities and definitely a more complex procedure for companies with multi-national plans, he added.
Gohdes called on all industry representatives to make use of the consultation period, which the IASB has set until September 6, to put forward comments on the proposal.