A bunch of foreign corporations likely are starting to
reevaluate their pension plans asset allocations, thanks
to the International Accounting Standards Board.
In June the IASB, whose accounting rules are used by about
120 countries that include all European Union members,
published its amendments to IAS 19 Employee Benefits, which
cover how defined benefit plan sponsors handle pensions in
their financial statements. The final rules diverge from some
of IASBs more controversial earlier proposals, such as
requiring all actuarial gains and losses to go through a
companys P&L, says Ken Stoler, a
PricewaterhouseCoopers LLP partner. Instead, that will show up
in the less-prominent OCI (other comprehensive income)
statement. They did back off of a number of things that
they were going to require, he says.
The IASB changes do not directly impact most U.S.-based
companies, says Jim Verlautz, a principal at consultant Mercer,
but they do apply to U.S. subsidiaries of foreign companies.
Still, the new rules that take effect in January 2013 may
indicate some future direction as IASB and the US-based FASB
(Financial Accounting Standards Board) continue trying to
harmonize their rules.
The biggest deal is taking away the income statement credit
for a plans expected return on assets. Under todays
IASB rules, a company can take credit through its net income
for that expected return, which the company itself sets based
on what it assumes the invested assets will earn in the market.
The new rule is that credit will be based on the same
interest rates used to discount their obligations, which are
current high-quality corporate bond rates, Stoler says.
The new, considerably lower credit could translate into a big
drop in reported income for some companies.
And the shift could influence pension sponsors
asset-allocation strategies. If we are going to see any
real changes made by companies, this is probably where it is
going to happen, Stoler says. Some companies may
say, If we are not going to get credit through income for
having invested in riskier stuff, then maybe it is not worth
it. Maybe they will move more into fixed income, because
that is all they are going to get credit for anyway. It is
something that companies are really thinking about.
Verlautz also expects to see some companies go to a
de-risking strategy, but mentions a couple of other
possibilities. IASBs decision not to have actuarial
fluctuations immediately go through the P&L will lead some
sponsors to get more aggressive, he thinks. Those
companies will say, I will go and get the biggest return
where I can, and if I gamble and lose, it does not go through
P&L, he says. And other companies will not want
accounting rules to drive their investment decisions, so they
will opt not to change their portfolios in response.
The new rules also eliminate the corridor
approach that allows deferred recognition of changes in
the value of plan assets or liabilities. Current rules allow
companies to smooth changes over time or recognize them
immediately; many already do the latter. They are getting
rid of the smoothing option, so everybody will have to play by
the same rules, Stoler says. But this will not impact the
actual cash requirement for funding, he says, since funding
rules are not based on numbers used for financial