SWITZERLAND - The use of the net interest to calculate pensions assets will lead to a de-risking of pension plans and lower returns, according to Peter Zanella, director of retirement services at Towers Watson Switzerland.
Under the revised IAS19 regulations, companies have to apply a net interest rate rather than the expected return in their calculations of pension assets.
Zanella said the new accounting standards would increase pension costs, as the expected return had traditionally been higher than the net interest.
"On the other hand," he added, "I fear a development toward more risk-averse investments, as risky securities such as equity will be traded in for fixed-income investments such as bonds - this will happen in a macroeconomic environment where certain government bonds can no longer be seen as safe securities."
Zanella said that even Swiss government bonds might be facing devaluation in the future given the "reckless euro investments" by the country's national bank.
He argues that de-risking in pension plans will lead to lower returns and therefore lower interest on the plan assets for members.
"Companies might even have to hike their contributions to compensate for this, as occupational pensions are an important element for competitiveness," he said.
However, he welcomed other parts of the revised IAS19 regulations, such as the scraping of the 'corridor' previously criticised by Profond head Herbert Brändli.
Zanella said he preferred volatility in equity - which "investors are aware of, as they know that OCI creates volatility" - to uncertainty in pension costs, which will now be made more easily calculable under the new standards.
As for Brändli's claim that the revised IAS19 is "ruining" occupational pensions, Zanella said the statement needed to be put into perspective.
He pointed out that the de-risking and the pressure on companies to keep pension liabilities low had already existed under the current IAS19 standards.
Zanella added that he felt the revised regulations were "heading in the right direction" by addressing some of the previous criticism.
Apart from the scraping of the corridor, the new regulations also allow companies to calculate employee participation in recovery programmes into their pension liabilities.
"This new regulation reduces the liability under IFRS," Zanella said, but he added that it "might be a challenge to represent it in a simple manner" in the accounts.
Another challenge Zanella sees on the horizon is phase 2 of the IAS19 revision, which is set to change the definition of defined benefit plans.
"The method we are currently using for Swiss pension plans is not ideal, but it might be better than any complicated calculation, including evaluating options they might come up with," he said.
At the moment, Swiss plans under the mandatory second pillar are being treated as defined benefit plans despite their being more like cash-balance plans, Zanella said.