GLOBAL - Reported pension costs will rise on a corporate sponsor's profit and loss account under revised International Accounting Standards Board proposals. However, this higher charge is the lesser of two evils, according to Hewitt Associates, as earlier proposals would have cost substantially more.

An exposure draft is due on new rules for IAS19 which is expected to become the new standard from 2011 and will increase P&L charges for many defined benefit schemes, according to the consultancy.

Under its calculations, Hewitt believes the change will lead to a £4m (€4.38m) charge on a DB scheme closed to new members and carrying a £1m credit or service cost. It says the combination of interest cost on £400m in accrued benefits - at a 5% discount rate - and 6.5% expected rate of return on £340m in assets would in fact end up as a quadrupled charge thanks to a £1m service cost and £3m on the deficit.

The actual cost could have been substantially higher as earlier proposals would have meant this £1m service cost would actually have amounted to £21m charge, according to Simon Robinson, pension consultant at Hewitt Associates.

"We do welcome this proposal as it is less painful than an approach the IASB was considering in which credit whatsoever would be given in the income statement for advance funding of pension plans; where the expected rate of return on assets would have been considered to be nil. Using that - thankfully discarded - approach, the charge to the income statement in the example would have changed from a £1m credit to a £21m charge," said Robinson.

His colleague, Martin Lowes, also noted the ‘corridor' approach - the ability to defer recognition of gains and losses - adopted by Dutch pension funds in particular, is also being withdrawn under the new proposals, and is therefore likely to increase the volatility of pensions accounting on corporate balance sheets.

This latest development follows evidence presented by rival consulting firm Mercer suggesting corporate sponsors may seek to become more involved in the investment strategy decision-making as these changes to the ‘expected return on assets' are likely to wipe out any benefits they see from suggesting equities will perform better than bonds. (See earlier IPE story: IAS19 could force sponsors to push for lower-risk strategies)

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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