The International Accounting Standards Board issued new guidelines last week on IAS19, the international accounting standard on pension fund accounting. These guidelines mean that companies can only take credit for a pension fund surplus if they have the “unconditional” right to a refund of the surplus or if they can use it to reduce future employer contributions.
The new guidelines will have the greatest impact in countries which have strong minimum funding rules for pension funds. In the UK, for example, many companies and trustees are discussing setting a funding policy and investment strategy which aims to accrue assets over and above the current IAS19 accounting liability. The new guidelines will effectively require these companies to account for liabilities at the higher agreed funding target. This would consequently mean that the additional funding will disappear into an accounting “black hole”.
“This change will force many companies to consider where to position their funding targets and extent to which they should be taking investment risks with their pension plans.” says David Fogarty, a worldwide partner in Mercer’s Financial Strategy Group.
“On an accounting basis, many FTSE 100 company schemes are now fully funded and a good number of others are nearing that position. In future, companies may want to re-direct their investments from equities to bonds as any visible economic benefit of accumulating surplus assets may be lost.”
He concludes: “Finance directors and treasurers should consider the impact of these rules on their profit and loss accounts, balance sheets and funding policies as a priority. The new interpretation comes into force as a mandatory requirement for annual accounting periods starting from 1 January 2008.”