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The Actuary The magazine of the Institute & Faculty of Actuaries

IAS19 could increase reported profits for risk-aware firms

As many as one in 10 of the FTSE 100 companies that support defined benefit pension schemes could benefit from changes to the IAS19 accounting standard, according to research by PensionsFirst.

Previous reports have highlighted the potential negative impact of the changes introduced by the International Accounting Standards Board (IASB), which include removing the current expected return on scheme assets income statement credit and replacing it with interest on the scheme assets at the AA-rated discount rate [The Actuary 21 June; The Actuary 17 May”.

However, PensionsFirst suggests that this will depend on the types of assets that schemes are invested in. For those schemes with lower-risk investment portfolios, it is quite possible that the returns expected on their scheme assets are below the yield on an AA-rated corporate bond, the firm says.

In these cases - which account for around 10% of the FTSE 100 - the income statement charge for pensions will become lower once the accounting changes are applied, resulting in increased profits.

"Some schemes are now in a position where they have de-risked their assets to more closely match their liabilities," says Matthew Furniss, assistant vice president at PensionsFirst.

"As a result of being invested predominantly in lower risk assets such as gilts - which may not be expected to yield the same levels as highly rated corporate bonds - such companies will therefore experience increased profits as a result of the accounting changes. This can only incentivise more de-risking within the pensions industry."