The International Accounting Standards Board (IASB) should tackle the accounting challenges presented by hybrid pension plan designs, according to Canadian lawmakers.

The Canadian Accounting Standards Board (AcSB) urged the IASB to consider the research and “either add it as another dimension” to its existing feasibility study into pension benefits that depend on asset returns, or to take it on as a separate project.

“Our findings point to the need for further guidance on accounting for hybrid pension plans to better reflect their economic characteristics and reduce diversity in practice,” said the AcSB.

The comments came as AcSB presented the findings of an international research effort into hybrid pension plan accounting . 

Tim Marklew, partner at Lane Clark & Peacock , said: “Accounting standard setters have been grappling with this problem for many years without making a great deal of progress.

“This lack of rules can matter. In the UK the problem is that pension schemes are either defined contribution [DC] or defined benefit [DB], and the risk falls either on the employer or the employee.

“It is very difficult to make hybrid plans work given the lack of rules for dealing with them. And that has been a barrier to their take-up.”

The UK has been debating the introduction of collective DC plans – a form of hybrid pension provision – for months, with the Royal Mail Pension Plan leading the support. However, many commentators have expressed concern over regulation and accounting, among other aspects.

Alistair Russell-Smith, head of corporate consulting at Hymans Robertson , said the time was right for the IASB to consider the issue.

“It feels like it is a sensible time to be thinking about this sort of plan,” he said. “[Hybrid plans] are rising in profile – we see it happening in the Netherlands.”

The Canadian-led research is a summary of the results of research carried out by standard setters in Canada, Germany, Japan, the UK and the US on hybrid pension plans.

The rise of hybrid pensions

Such arrangements have proliferated in many countries as schemes have ditched traditional DB provision and moved instead towards forms of DC provision with features such as an investment-return guarantee or other promises.

However, these types of pension arrangements can give rise to accounting challenges under both local GAAP and International Financial Reporting Standards (IFRS).

In particular, the binary ‘DB or DC’ nature of classification under International Accounting Standard 19 (IAS 19) causes both classification and measurement issues for hybrid schemes.

The IASB is currently weighing the feasibility of running a research project on asset-return linked pension plans .

Staff signalled last month that they were about to bring papers to the board for its consideration.

Complications arise

Further complicating the landscape, however, was the IASB’s decision to consider its previously separate work on IFRIC 14 and the IAS 19 asset ceiling, against the context of this research stream.

Researchers took as their starting point the question of whether IAS 19 was “fit for purpose” in terms of its outcomes representing the economic characteristics of the pension obligations being reported.

From that starting point, staff surveyed both plan designs and also their accounting characteristics, taking feedback from 25 audit firms and consultancies.

The analysis identified four broad types of plan alongside traditional DB and DC plans: two types of shared-risk plans, cash-balance plans and security-linked plans.

It also established that there were differences in how these plans were classified both within and across jurisdictions.

The 10 July meeting also heard that, where scheme sponsors had relied on actuarial input to value their pension liabilities, those actuarial approaches were potentially opaque to users of the accounts. 

As for the way forward, the AcSB said it had identified no clear solution to the various challenges posed by the different types of plans.

It indicated that the IASB could consider unbundling the DB and DC elements within its rules and look to bring in “a specific measurement methodology with also a focus on guarantees”.

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