IFRS committee backs fair-value accounting for longevity swaps
The International Financial Reporting Standards (IFRS) Interpretations Committee has tentatively ruled that defined benefit (DB) plan sponsors must account for longevity swaps as single-instrument plan assets held at fair value.
Details of the tentative decision, reached during the committee’s 11 November meeting, are set out in the latest edition of IFRIC Update.
The IFRS IC, which is responsible for interpreting international accounting standards, received a request in August to clear up confusion around the accounting for longevity swaps held by a DB plan.
The anonymous submitter, tipped by sources to be a ‘Big Four’ audit firm, noted that there were two possible approaches to the problem.
Under the first approach, a scheme sponsor would book the swap as a plan asset and measure it at fair value.
Following an alternative accounting approach, however, a sponsor would treat the swap as a qualifying insurance policy and book the premiums as a liability.
A longevity swap transfers the risk of pension scheme members living longer than expected from pension schemes to an external party.
This external party is usually an insurer or a bank.
The effect of a swap transaction is to freeze or settle the DB plan sponsor’s obligations to the scheme members.
Longevity risk is one of the biggest risks faced by DB pension schemes.
It can lead to schemes paying out higher pension payments than expected and, as such, push a fund into deficit.
A DB pension obligation is accounted for under IFRSs by following the requirements of International Accounting Standard 19, Employee Benefits (IAS 19).
A separate accounting standard, IFRS 13, Fair Value Measurement, deals separately with fair-value issues.
Both standards are updated and maintained by the International Accounting Standards Board.
The IFRS IC is charged by the board with developing interpretive guidance on those standards.
The committee can also propose amendments to IFRSs such as IAS 19.
In support of their recommendation against adding the issue to the committee’s agenda, staff argued that the issue was “not currently widespread” and “material diversity in practice is not observed.”
Committee member Reinhard Dotzlaw questioned this assessment, however.
Dotzlaw argued that, although in Canada “we don’t see longevity swaps”, they were nonetheless “not uncommon in certain other jurisdictions like the UK”.
London-based consultant actuary Simon Robinson told IPE: “Swap transactions the moment are rather complicated and only suit a small number of schemes.
“Typically, again in the UK, it has tended to be the bigger pensions plans with the more sophisticated trustees that have gone down this route.”
Interested parties have until 20 January 2015 to comment on the committee’s tentative decision.
The IFRS IC expects to finalise the agenda decision during its March 2015 meeting.
Separately, during their 11 November meeting, committee members retreated back from the possibility of requiring DB sponsors to remeasure a DB liability to account for significant market fluctuations.
The issue arose out of the committee’s project to propose an amendment to IAS 19 dealing with remeasurement of the net DBL in the event of a plan amendment or curtailment.
Given that the issue is proceeding as an annual improvement to IAS 19, the issue will go forward to a future meeting of the IASB.