UK - Proposed changes to pension accounting standards could exaggerate volatility in pension fund liabilities and make them appear more risky than other corporate liabilities, Hewitt Associates has warned.

The pensions consulting and outsourcing firm claimed the International Accounting Standards Board (IASB) needs to examine the "wider accounting framework" rather than "singling out" pension schemes for particular attention.

The IASB issued a consultation in March in which it suggested a number of changes including the removal of deferred recognition of investment gains or losses on the balance sheet, and the creation of a new category of  'contribution-based schemes'. (See earlier IPE article: Career-average schemes hit by IASB proposals)

Following the closure of the consultation on 26 September, Hewitt Associates has revealed its view is similar to that revealed elsewhere across Europe, as the firm said the interim proposals to address concerns with the existing accounting standards could increase the rate of migration from defined benefit (DB) schemes to defined contribution (DC).

Simon Robinson, pension consultant at Hewitt, admitted there are flaws in the current IAS19 standard and welcomed some of the IASB changes, including the removal of deferred recognition of gains and losses on the balance sheet, which is currently "misleading".

However Hewitt said it is concerned the new proposals "single out pension schemes for particular attention, increasing comparative volatility" with other company liabilities such as debt.

Robinson added: "We firmly believe all liabilities should be calculated using a consistent approach. In the current economic environment this is particularly important. Mark-to-market accounting, which is based on the current 'market value', is an informative method of valuing liabilities but isn't applied to all corporate liabilities."

As a result he claimed the IASB "needs to address the wider accounting framework to correct this discrepancy", otherwise he warned pension schemes will appear riskier than other corporate liabilities causing employers to focus unnecessarily on this perceived riskiness, which in turn could further increase the "rate of migration" between DB and DC.

In addition, Hewitt suggested the creation of the new 'contribution based' category of schemes would make "arbitrary distinctions" between pension schemes, further reducing the comparability of pension liabilities and other liabilities.

For example, Robinson claimed the proposals mean identical pensions could be valued differently depending on the type of scheme they started as, so potentially "less generous career-average pension schemes appear more costly than 'gold standard' final salary schemes".

The consulting firm also highlighted a lack of clarity on the definition of "fair value measurement" proposed by the IASB in relation to contribution-based schemes, and the practicality of some of the proposals as some calculations would be expensive and time consuming to prepare.

Robinson said: "Such fundamental changes to pensions accounting should be put on hold until all the issues we have outlined have been properly addressed."

The IASB, which is expected to report back on the consultation findings next year, has also been criticised by the National Association of Pension Funds (NAPF) for presenting proposals that are too radical and "pre-empt" the results of a later review.  (See earlier IPE article: NAPF queries IASB's 'radical tidying' of pensions accounting)

In the meantime, the IASB has also published an update on its response to the credit crisis, in which it confirmed it is "closely monitoring developments in the United States and other jurisdictions to avoid unnecessary inconsistencies in accounting treatments under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (GAAP)".

To this end it revealed it is implementing the following actions:

Ensuring consistency of fair value measurement guidance between IFRSs and US GAAP Consideration of the possible impact of the US Emergency Economic Stabilization Act of 2008 and other similar programmes internationally on the valuation of assets and liabilities Immediate consideration of the ability to reclassify financial instruments Willingness to participate in any study on the impact of accounting in the credit crisis


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