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The Actuary The magazine of the Institute & Faculty of Actuaries

Pension fund management and accounting

The Financial Economists Roundtable (FER) issued significant criticism of current (mainly North American) practice on 22 December. The statement included four specific suggestions:

  • demanding reversal of the measure in the Pension Funding Equity Act of 2004 which allowed companies to value liabilities using a proportion of corporate bond yields rather than Treasury bond yields;
  • requiring the Pension Benefits Guaranty Corporation (PBGC) to charge risk-related premiums to underfunded schemes so as to reduce the current high probability of requiring ultimately to be rescued by the taxpayer;
  • requiring pension funds to invest overwhelmingly in marketable securities and to report regularly on market values of assets, including stricter rules for market-consistent valuation of illiquid assets;
  • eliminating the practice of smoothing deficits over multiple years which in the view of the FER at times ‘creates the illusion of improvement for plans whose position is in fact worsening’.

Professor Elroy Dimson of London Business School noted that various of the suggestions, including for example that in relation to the PBGC, translated into a UK context.

The FER statement followed days after the IASB had issued amendments to IAS19 Employee Benefits. The IASB decided to allow the option of recognising actuarial gains and losses in full in the period in which they occur, outside profit or loss, in a statement of recognised income and expense. This option is similar to the requirements of the UK standard, FRS17 Retirement Benefits.

Previously IAS19 had required actuarial gains and losses (unexpected changes in value of the benefit plan) to be recognised in profit or loss, either in the period in which they occur or spread over the service lives of the employees. Many entities choose to spread the gains and losses. Under the amendment, entities that at present spread the gains and losses are not required to change their approach, but are now free to choose to do so. In particular, the amendment allows companies that are already showing the surplus or deficit in full under FRS17 to continue with their present policy.

The approach adopted by IASB attracted different views from actuarial consultants. Watson Wyatt favoured it as affording choice for companies, but Lane, Clark & Peacock criticised the potentially very different treatments by companies of pensions costs.