Avoiding the 'DB killer'
Agreement on the translation of IAS 19 accounting standards for Dutch pension funds looks set to allay fears about how the standards might affect the Netherlands’ predominantly defined benefit (DB) pension plans.
According to Jeroen Steenvoorden, director of the OPF, interested parties, including the OPF, have been talking to and lobbying the Dutch Accounting Standards Board for some time on the issue, conscious of the effect that FRS17 is believed to have had in prompting UK pension funds to move towards defined contribution (DC) arrangements.
The final document should offer guidelines as to how Dutch pension plans can be treated using IAS 19.
“This is a worrying issue, although it’s nothing to do with current solvency issues though, because it was also a worry five years ago when we had overfunding!
“It’s a worry because it can be a DB killer and most of my members operate DB schemes and we think that they are reasonably well funded. But, if accountants look at these issues in a different way then it can trigger effects like what you have seen in the UK with FRS17 and the shift to DC.”
Steenvoorden notes that one of the main difficulties in translating IAS 19 in the Netherlands is that the pension fund governing structure is different than in the US.
“If you have a strict translation of IAS 19, it doesn’t fit very well in the Dutch system.” One of the main differences is the legal separation between Dutch pension funds and the sponsor. In Holland there tends to be more distance between the company and the plan.
“If the pension fund is really separate and the only obligation an employer has is to pay is a premium which might be relatively high because the pension fund doesn’t want to take too much risk, but which stops at a certain level, then it is a DC type of scheme from the employers point of view because the actuarial and investment risk is with the pension fund and not with the company.
“In that case you can, in our opinion, treat it as a DC scheme, although the employees receive more or less a DB guarantee from the pension scheme.”
A further issue, he says, is that of “conditional indexation”. “Many pension schemes in the Netherlands say they will give pensions in line with indexation if there are investment profits.
“If you look at IAS 19 and translate it literally then you have the constructive obligation method, meaning that if you have indexed for a few years you are obliged to index for ever, or at least take account of that in your provisions. However, indexation is typically something provided by the pension fund, not the employer, and it is means-related so that in the last few years a number of funds have not indexed.
“What we are saying is that if there is absolutely clear communication with the employees that this is conditional then you can treat it as such and you don’t have to take these kinds of reserves into account.”