IAS19 changes could hit pension deficits
GLOBAL - Pension schemes' deficits could be hit after the International Accounting Standards Board (IASB) ratified new rules on the interpretation of the IAS19 accounting standard.
A draft by the IASB's interpretations committee entitled ‘The limits on defined benefit assets, minimum funding requirements and their interaction' was ratified earlier this week, affecting how companies report their pension scheme obligations in their accounts.
But Matthew Pearlman, a partner at Lane Clark & Peacock (LCP) corporate consulting, has warned the interpretation will send a signal to pension scheme sponsors suggesting it may not be in their interest to agree to fund schemes more generously than IAS19 levels.
"The devil is in the detail," he told IPE today, adding "the clear message is, if you are in the middle of a funding negotiation now, you have to think very carefully of what the implications are."
Pearlman warns companies will need to look closely at how the interpretation will apply to their specific circumstance.
"The interpretation refers to a minimum of funding requirement, but they are deliberately not saying what the minimum funding requirement is," he said.
As the minimum funding requirement has been replaced by a statutory funding objective - where sponsors and the trustees come together to agree a funding objective and a schedule of contribution - "the implication is that once they've agreed that by statute the company has to pay those contributions," argued Pearlman.
He added private equity firms should also look at this latest interpretation very carefully.
"Trustees are likely to demand higher funding levels when their sponsors have significant borrowings," said Pearlman.
"This will mean that if trustees do flex their muscles following a typical private equity purchase, the balance sheet could take a substantial hit," he added.
Anne McGeachin, senior project manager at the IASB, was keen to emphasise the Interpretation applies only when an entity has to make contributions to a plan because of statutory or contractual requirements, and will not be able to get those contributions back if the plan later has a surplus.
"In those cases, the entity should recognise a liability. This is the economic reality of such a situation," said McGeachin.
The Pensions Regulator, which has been trying to encourage pension scheme sponsors to improve target funding levels, was not available for comment.