Changes to International Accounting Standardsmay prompt companies to review their pension plan asset allocation and investors to review the effect of pensions risk on companies, says Mercer.
The comments come as the IASB published a new way of accounting for company pension costs on 16" target="_blank">http://www.ifrs.org/News/Press+Releases/IAS+19+June+2011.htm">16 June 2011, says the company. The amended accounting standard (IAS 19) is being introduced to make financial statements clearer on the costs and risks caused by pension plans, and to make it easier to compare the impact of pension costs on reported profits between different companies.
Mercer welcomes any increased focus on risk management issues and points out that the new rules, effective from 2013, are likely to encourage companies to adjust the way that billions of dollars of pension plan assets are invested.
According to Warren Singer, a Principal in Mercer’s Global Accounting Standards Group, “Pension plan investments in equities will no longer directly lead to increased reported company profits, even if equities produce superior asset returns over the long term in line with consensus forecasts.”
Mercer believes that this will add to the trend of many companies reviewing whether taking risk in pension plans creates shareholder value. Moving out of equities to bonds tends to lead to more stable key performance indicators.
“Overall, this accounting change is likely to encourage better risk management from pension plan sponsors,” continued Mr Singer.
The revised International Accounting Standard 19 (IAS 19) will transform the way that pension plans are treated in many companies’ financial statements. While a pension plan is essentially a separate entity from the company, a plan’s liabilities and performance of the assets are reflected in the company’s financial statements. Currently there are options as to how this is presented, and careful scrutiny of the footnote disclosures is required at present to understand the different treatments.
The new IAS 19 rules will require the same treatment of pension plans in all cases; a change for many companies around the world.
This will prevent companies using pension plan investments as a vehicle to enhance their company’s reported earnings. It will also ensure that focus returns to addressing the myriad of risks facing pension plans. Mercer is also advising companies to pay special attention in their communications with investors. Many companies will see a reduction in reported profit as a result of the changes, even though there is no change to the underlying pension plan assets and liabilities.
Mr Singer said, “While investment analysts, credit rating agencies and sophisticated investors are typically aware of this issue and have already adjusted their expectations, many other investors may still be unaware of the implications.”
Mercer is advising companies to ensure that they communicate the impact of the IAS 19 amendments carefully to investors in advance of the change.
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