Employers oppose proposed pension accounting rules, survey finds

Employers believe changes to current pension accounting standards are necessary, but most are not in favour of the changes proposed in the International Accounting Standards Board’s preliminary views paper, according to a survey by consulting firm Watson Wyatt Worldwide. With the Canadian Institute of Chartered Accountants having previously announced the move to international standards by 2011 and the Securities and Exchange Commission’s vote to move the US toward international standards, the proposed changes could have a significant impact on the financial statements of almost all Canadian employers who sponsor defined benefit pensions and other post-employment benefits.

In the survey of 131 finance and employee benefit directors across 17 countries, most respondents said change is needed in several key areas of pension accounting. Improvements to requirements for the measurement of cash balance and similar pension plans are viewed as most necessary, with eight in 10 employers desiring change in this area.

A narrower majority (56%) agrees with the IASB that pension accounting should change by removing options to defer the recognition of plan gains and losses. Eighty percent of respondents, however, do not support the IASB’s suggestion to recognize all plan experience immediately in the profit and loss account, one of three options the IASB is considering in this area.

“The IASB’s proposal would make substantial changes to the way retirement benefits are accounted for under International Financial Reporting Standards,” says David Burke, retirement practice director of Watson Wyatt’s Canadian offices. “With Canada and the United States joining Europe and other countries in the adoption of international standards, all Canadian companies would be well served to familiarize themselves with the proposals and assess the potential impact of the changes on their existing plans.”

Currently, there is low awareness of the IASB proposal among North American employers. Across all regions, many companies familiar with the proposed changes to IAS19 – the International Accounting Standard for employee benefits – have yet to take action. As of early July, only 12% had analysed or quantified the potential ramifications of the proposal on their plans. Forty-six percent, however, planned to learn more about the proposal and 51% planned to analyse its possible effects by September 26, 2008, the end of the IASB comment period.

While the changes would not reduce most employers’ commitment to offering pension plans, a sizeable minority said the proposed changes to cost recognition (46%) and to the measurement of contribution-based plans (24%) would discourage them from offering defined benefit plans in the future.

“If implemented, the proposed changes could mean increased volatility in employer financial statements,” says Doug Chandler, a senior retirement consultant at Watson Wyatt. “The more companies engage the IASB in a dialogue, the better. Providing early feedback could help influence the development of standards that might be adopted down the road.”

Other findings

Other proposed changes that are unpopular among employers include:

Introducing the contribution-based promise, a new classification of benefit that would include cash balance, career average, notional defined contribution and flat dollar/multiplier plans. It would use a different measurement approach than final average pay and retiree medical plans, a change 50% of respondents find inappropriate and 38% support.
Requiring the measurement of pension obligations to reflect credit risk, which 54% of employers find inappropriate and 29% support.
Introducing different accounting treatment for in-payment annuities based on how they were defined as they were accumulating, a change 53% of respondents find inappropriate and only 24% support.

Employers have different priorities than the IASB: they believe improvements to requirements for the measurement of cash balance and similar pension plans are most necessary. The IASB has indicated it might make this area a lower priority going forward and instead focus on changes to cost recognition, which are viewed as less necessary and less appropriate among employers. Additionally, 58% of respondents believe requirements for the measurement of final salary and retiree medical plans should be improved – an area not addressed in the IASB’s discussion paper.

Copies of the survey report, Accounting for Employee Benefits: Reactions to the IASB’s Preliminary Views Paper From Around the World, are available at watsonwyatt.com/accountingreform. For more information on the IASB’s proposal, Preliminary Views on Amendments to IAS19 Employee Benefits, visit watsonwyatt.com/news/globalnews2.asp?ID=18901&nm=Global.