Requiring companies to show pension scheme losses in their profit and loss accounts would deal a potentially fatal blow to final salary pension schemes, says a leading firm of pension consultants. Aon Consulting was responding to proposals contained in the International Accounting Standard Board’s latest IFRS Update.
In the Update, published at the end of January, the IASB “tentatively decided” that entities should disaggregate changes in defined benefits obligations and in pension scheme assets into employment, financing and remeasurement components, recognising these components in the income statement.
In addition, entities would disclose the employment and financing components either in the income statement or the notes, presenting the remeasurement component in the income statement. Further discussions will take place by the IASB later this month to refine these provisional decisions and to clarify how items should best be defined and presented.
But remuneration advisers Aon Consulting warns that the move could be the end for final salary pension schemes. Marcus Hurd, head of corporate solutions at Aon Consulting, says: “Final salary pension schemes have received yet another hammer blow. Over the last few years they have had to deal with ballooning deficits and significant asset losses, but now the IASB has seemingly killed off any last chance of keeping this type of pension alive.
“If this decision had come into force at the beginning of 2008, then the overall impact – on the Aon200 index, the top 200 final salary schemes – of asset losses would have been to increase the profit and loss pensions charge of UK plc by around ten times, from £10bn to around £95bn, although some of this would have been offset in 2008 by artificial liability gains.
“The IASB’s decision would have reversed out a £25bn credit of expected return on assets and replaced it with £60bn of actual asset losses – a net loss of £85bn. These numbers would have distorted the true underlying profitability of the core businesses and added to the woes faced by companies in a struggling economy.
“In reality, all the IASB decision does is add to the headache already faced by companies and fast forward the demise of the UK’s final salary pension schemes. All companies that offer final salary pension schemes, which affects the majority of the FTSE100, will now likely be reviewing their decision to keep their final salary pension scheme open before the IASB decision takes effect, which is likely to be in 2011.
“For many companies, the profit & loss is too fundamental to be messed around by pensions, even if the underlying rationale for keeping schemes open is sound. The claim that 50% of company schemes will be closed by 2011 now seems optimistic, we could see this figure rise to nearer 80%.”
Aon’s cataclysmic interpretation of the IASB decision was refuted by the IASB itself. Anne McGeachin, senior project manager at the IASB with responsibility for its pensions project, says: “The proposals simply seek to provide investors with a more informative assessment of the effect of the surplus or deficit of a pension scheme.”
Naz Peralta, principal consultant in KPMG’s pensions practice, also believes that Aon have overstated the impact of the proposed changes. “We spoke to a lot of clients last year about the IASB’s proposals and the consensus view was that if pension fund gains and losses moved to the P&L they would simply look to list it as a separate line in their income statement,” he says. “The IASB is simply saying the same thing. Our view is that informed analysts will look at this new volatility in the same way as they currently strip out other items such as intangible asset amortisations.
“It will inevitably make company directors think more about volatility. It will increase visibility. Companies will get more questions from investors. It will affect the bottom line earnings per share but not dividend policy. Aon’s main headline is the ‘end of final salary pensions’ – to be frank, every statement from the regulator or standard setter is met by someone saying this is the end of final salary pensions. This is more of a presentational issue as it doesn’t affect the underlying economic fundamentals of the pension liabilities.”
Ken Wild, partner and IFRS specialist at Deloitte, shares the scepticism about Aon’s claims. “I have lost count of how many times I have heard how if some standard setter goes ahead and does something then the world will end,” he says. “So far I haven’t noticed the world ending.
“I think the Board’s proposal is far from being brought into practice. Lots of commentators will have their say. It has to be tied into what is happening on presenting financial statements – it’s part of the bigger picture. The world’s not going to end.”