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Accounting roundup: EFRAG proposes new approaches for pension promises

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The European Financial Reporting Advisory Group (EFRAG) has received a lukewarm response to its discussion paper proposing three possible new accounting approaches for pension promises linked to an asset return from three key constituents in Germany.

In a limited endorsement of the EFRAG proposals, the president of Germany’s accounting rulemaker, the Accounting Standards Committee of Germany, Andreas Barckow, wrote:

“[W]e do not favour an introduction of any of these approaches.”

However, Dr Barckow continued that the ASCG nonetheless favoured the capped asset-return approach – provided EFRAG widened its scope to include pension promises backed by plan assets.

The ASCG chief said EFRAG should “develop the Capped Asset Return approach into a Fixed Asset Return approach, where the expected return is matched with the rate used to discount the liability.”

He explained, “In many countries, including Germany, the reference assets often are not held as plan assets (i.e. the asset ceiling is not applicable).

“In such situations, the pension obligation would not be measured appropriately in cases where the expected return is lower than the discount rate.”

EFRAG, which advises the European Union on accounting matters, issued its pensions accounting discussion paper on 15 May.

The paper explores three alternative accounting approaches to deal with pension benefits linked to an asset return.

EFRAG restricted the scope of its proposals to include only those pension promises where the plan sponsor holds the assets referred to in the plan.

So-called hybrid pension promises – such as higher-of plans, or those linked to the performance of a pool of assets or an index – are challenging to measure under International Accounting Standard 19, Employee Benefits.

To address this, EFRAG has proposed three possible accounting alternatives: capped asset return; fair-value-based; or fulfilment value.

andreas barckow at efrag

Andreas Barckow at EFRAG

Meanwhile, the body representing German pensions actuaries, the IVS, while summing up the capped asset return model as “certainly debatable”, also urged EFRAG to develop it further.

They too, however, pressed EFRAG to develop it further “into a fixed asset return approach, in which the expected return included in the measurement of the obligation is replaced by the actuarial interest rate.”

The IVS said this would be conceptually consistent with the International Accounting Standards Board’s 2011 amendments to IAS 19.

Of the remaining two approaches, the IVS warned that plan sponsors might need to resort to costly and complex Monte Carlo simulations to value their liabilities under the alternative approaches to the capped asset return model.

Industrial giant Siemens, however, said it could see little point in developing the proposals with such a limited population of plans within its scope.

The firm said: “The discussion paper, however, makes it clear that the measurement of plan assets is not subject to the proposals of the paper which, from our point of view, is not very convincing since the link between the pension obligation and the performance of the (plan) assets is a vital part of the underlying question.”

Siemens currently has a DB exposure of roughly €4 billion – mainly in Germany – through pensions promises linked to an asset return.

It concluded that it could see no case for adopting “either of the three approaches presented in the Discussion Paper” in light of their inconsistency with today’s IAS 19 model.

The comment period on the proposals closed on 15 November.

FRC annual survey of pension assumptions

The UK Financial Reporting Council has released survey data showing that the accumulation rates used by pension providers “for 2019 illustrations were broadly similar overall to those used in 2018.”

The FRC obtained responses from a total of 22 providers who between them issued more than 33 million Statutory Money Purchase Illustrations.

A SMPI is a yearly illustration of the pension that a scheme member can expect to get on retirement at today’s prices.

It also takes account of inflation between the date of the projection and the member’s expected retirement.

The current framework for drawing up SMPIs is set out in Actuarial Standard TM1: Statutory Money Purchase Illustrations.

The FRC has compiled an annual survey of SMPI assumptions since 2013.

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