In the practice of international accountancy it is customary to have guidelines on including pension rights in the annual accounts, ie, SFAS 87 (US), SSAP 24 (UK) or IAS 19 (more than 100 countries conform to these guidelines).
These international guidelines serve to increase the transparency and harmonisation of the annual accounts of companies quoted on the stock exchange. Shareholders and financiers gain more insight into pension liabilities and capital in conformity with an explicit uniform method.
In 1999 the Dutch council which issues annual reporting guidelines sought to bring Dutch guidelines into line with the IASC. Its new draft Guideline 271 is almost entirely based on IAS 19 Employees Benefits (revised 1998).
The way in which the pension rights are included in the annual account follows the Anglo-Saxon pattern. This implies that the liabilities are viewed as the company’s own liabilities whether the implementation is done by a pension fund or in another way. Enforcement of this guideline has consequences for both the company’s balance sheet position and its profit-and-loss account.
According to the guideline future salary increases and indexation of pensions should be taken into account in determining pension liabilities. In the Netherlands it is customary to determine liabilities at their time-proportional face value. Moreover, the interest rate, on the basis of which the liabilities are cashed in, is not determined at the customary 3 or 4% but at the returns of bonds issued by companies and government.
If these determined liabilities are higher than the real value (market value) of the investments covering these liabilities, there is a pension deficit that is to be included as a liability in the company’s balance sheet. If there is a surplus, it is included as a deferred asset.
In determining the pension liabilities that are included in the profit-and-loss account, future salary increases and indexation are taken into account as well. The determined pension costs, in which expected investment returns are viewed as assets, will usually deviate from the actual pension contribution paid by the company. The company is confronted with yet another liability that will considerably affect its results.
The effect on the profit-and-loss account and the balance sheet position as described above will not occur if the pension plan has been placed with an industry-wide pension fund or if the company has a defined contribution plan.
It is not inconceivable that the Dutch guideline will be altered yet as a result of the “unfair” treatment of companies that have a pension plan placed with a company pension fund or with a life assurance company.
The subject is still under discussion and a conclusion is not in sight yet, but it is certain that the Netherlands can no longer escape international accountancy regulations. The definitive version of the guideline is expected at the end of 2000.
Ugo Hofman is a certified actuary with Consultas in Zwolle, a member of the Multinational Group of Actuaries and Consultants