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The Actuary The magazine of the Institute & Faculty of Actuaries

IAS19 and Solvency II principles threaten pension schemes in 2012

The European Pensions Briefing, from consultant LCP, found deficits at the world's 100 largest companies had increased by €120bn in 2011.

LCP corporate consulting head and partner Alex Waite said: "Pressure to deal with new pensions accounting under IAS19, volatile markets and regulatory uncertainty are likely to lead to further pressure for organisations to reform pension plans in every one of the many countries where our clients operate."

Waite said the firms had disclosed pension scheme deficits of €170bn this year.

"To put that in perspective, it's equivalent to the cost of the Greek bailout. And as 2011 has proved, just because it's bad at the start of the year, doesn't mean it can't get worse."

He said last year's report estimated there was a one-in-10 chance deficits could increase by €100bn or more.

"In fact, over the year so far, the combined deficit has increased by over €120bn," he added.

LCP said the threat of regulatory risk "looms large" for schemes across the continent.

It said Solvency II principles were a "real prospect" for schemes, which could undermine the sustainability of many funds across Europe.

And new pension accounting rules could present additional risks for multinationals at a time of severe economic crisis. For many companies, the new disclosure information required under IAS19 will be required from an effective date of year-end 2011.

LCP partner Phil Cuddeford co-authored the report.

He said: "Analysts, lenders and shareholders will take a long hard look at companies' 2011 annual report and accounts in the light of the new accounting changes. Those that have taken steps to manage pension risks will send a clear and confident message to the markets.

"Those that haven't may well find that they are judged harshly by markets and lenders increasingly concerned about pension risks."

He also said companies should consider de-risking methods to "batten down the hatches for the storm ahead".

The three main changes under IAS19 are:

• No more ‘corridors': This will be a particular issue for Dutch companies and would reduce shareholder equity - for those companies in the survey who currently use the corridor method - by about €16bn, potentially affecting loan covenants.

• No more ‘expected returns': This will decrease the profits of 66 of the FTSE Global 100 by a total of €14bn.

• Increased disclosure: new disclosure requirements will accompany the introduction of a principles-based approach.

Source: Professional Pensions