EUROPE - The scrapping of the “expected return on plan assets” passage under the revised IAS19 regulations will lead to a more pragmatic but less “true and fair” view of pension plans, Bernd Hackenbroich, actuary at PricewaterhouseCoopers in Germany, has said.
At a conference of the Austrian actuarial society (AVÖ), the guest speaker commented on the near final draft on IAS19 published by the IASB a few days prior.
As expected, the draft, which according to Hackenbroich will most likely be the final one, includes the abolition of the use of “expected return on plan assets” for calculating asset levels.
Instead, companies now have to use the discount rate which is often lower than the “expected return”, especially for pension funds with high equity exposures.
“This ‘net interest’ approach is more pragmatic and free of arbitrariness but it will not give a ‘true and fair view’ and in many cases it will put a strain on P&L,” Hackenbroich explained.
He added that it will lead to “absurd effects”, especially with higher risk investors with a high equity allocation as the new approach does not reflect the actual asset allocation or the company’s risk approach in any way.
Asked whether he sees a change in risk attitude ahead because of the new IAS19 regulations Hackenbroich told IPE that it is unlikely to influence insurance-based schemes much.
However, vehicles such as the German contractual trust arrangement (CTA) “might reconsider the risk in their portfolio” depending on the intended purpose of the vehicle. “It is certainly no incentive to take more risk in investments,” he pointed out.
Another change expected to be introduced is the abolition of the “corridor”. All changes would retroactively be applied to any accounts ending prior to January 2013.
The OCI-approach is now compulsory which requires actuarial gains and losses to be calculated against the company’s equity and - in contrast to US-GAAP - does not allow recycling of losses.
“This will bring a high volatility to the pension assets and the company’s equity, which is nothing new for those who have used OCI so far - which are most of the DAX companies in Germany - but for medium-sized companies it will be a change as sometimes the difference can be a billion up or down,” Hackenbroich explained.
He added that there would also be a high volatility in the comprehensive income calculation but that P&L will remain “relatively predictable”. Hackenbroich said that the changes might render balance sheets less controllable as they are now more strongly influenced by external factors such as the financial market rate.
Additional changes mentioned in the near final draft are descriptions of major pension plans and their funding including important information for example whether it is a DC plan, final salary or whether it offers a bulk payment rather than annuities.
Companies will also have to inform about the make-up of the plan assets, whether they are using market pricing or estimates, on their risk structure, the market liquidity and their asset liability management. They will further have to offer a sensitivity analysis of their DBO and explain the method as well as any changes to it.
Further, the DBO has to be split into risk shares, such as how many pension liabilities and how many one-off payments to show possible longevity risks. The requirement to explain biometric assumptions in the pension plan has been abolished since the exposure draft issued by the IASB a year ago.
Hackenbroich commented that the more risk-oriented approach to the information in the appendices is to be welcomed, but that it does not decrease the risk of creating a “Zahlenfriedhof” - a “number cemetery” - with an unreadable amount of numbers in the balance sheet.
He also said he was decision that mystified by the decision not to include IFRIC14 in IAS19.