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The Actuary The magazine of the Institute & Faculty of Actuaries

£10bn hit for UK profits under IAS19 changes

Imminent changes to accounting standard IAS19 could dent UK company profits by as much as £10bn ($16bn), KPMG warns.

The professional services firm said a revised IAS19 - expected to be published later this month - would replace a more subjective expected ‘return on assets credit’ on companies’ profit and loss account with a lower ‘interest on plan assets’, calculated using the AA discount rate.

It said this move could dent UK reported profits by about £10bn.

KPMG said the IAS19 revisions, which will be applicable for financial years ending on or after 31 December 2013, will also include a number of other measures - including the end to corridor accounting options; the introduction of simpler accounting for plan changes; and the introduction of wider disclosure requirements, aimed at improving the comparability and transparency of pensions.

This comes as KPMG publishes its 2011 Pensions Accounting Survey revealing a reduction in scheme deficits of around £75bn during 2010 as strong asset returns more than offset slightly tighter real discount rates.

The survey also found that half of companies now benefited by using CPI as the inflation measure for at least some of their benefit provision.

Mike Smedley, pensions partner at KPMG in the UK, said: "For once, our survey paints a relatively rosy picture for UK pensions this year. The switch to CPI, stabilising life expectancies and strong asset returns on top of continued deficit contributions have combined to reduce liabilities for many UK companies.

"However with the economic outlook still far from certain, it is unclear how long these benign conditions may continue, making this a good opportunity for some to de-risk. Right now it’s possible to secure a buy-out on relatively favourable terms. In six months’ time, this may not be the case. And the new IAS19, due later this month, might also start to change company’s views - some may reduce investment risk to coincide with the removal of the P&L credit for asset returns."

[Source: Professional Pensions”