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IAS 19 redraft—Tolling the bell on final salary pensions?

Final Salary Schemes | IAS 19 redraft—Tolling the bell on final salary pensions? Anthony Harrington

One of the truly weird things about the accounting standard setting process is that with nothing but the deepest respect for God, truth, and the Anglo-Saxon way, successive standards bodies have managed to drive a stake through the heart of UK final salary pension schemes—and, by extension, they’ve killed them off for every other country around the world as well.

What the hell was wrong with final salary schemes? They were great! How I wish I had spent the last 30 years in one! As a benefit it’s worth more than a free house in most parts of the country. (OK, maybe not Mayfair…). This was paternalistic, benevolent capitalism at its finest.

So what did the standards bodies do? Well, they worried that companies were not actually reflecting the real, day-to-day risk of running a pension scheme in their accounts. Of course, it does not take a genius to see that there is something odd about wanting to reflect every momentary fall in the stock market as the “real” value of an asset that is going to mature in 30 years, when the Lord only knows what the value of markets will be at maturity. But, bless them, the standards setters wanted “transparency.” If there are risks involved in running a final salary pension scheme—and by now we all know in our bones that there are real risks—then users of accounts should be able to see and evaluate those risks.

That is all well and good, so long as it doesn’t put companies off final salary schemes and so kill the goose. Unfortunately, this is exactly what has been happening ever since the UK Accounting Standards Board introduced FRS 17 on pension accounting. One of the great innovations of FRS 17 was to force companies to gross up the total cost of any improvement in their pension provision for staff, over the whole life of the pension, and slam it straight into that year’s balance sheet. The result? You guessed it. After that, no company improved its pension scheme benefits. Improvements died on the spot.

Then the International Accounting Standards Board turned FRS 17 into IAS 19, more or less warts and all. Now the IASB, as part of its general mission of reworking all its standards, is giving IAS 19 a thorough overhaul. This, of course, is not good news for financial directors of plcs running final salary schemes. There are at least three major controversial points in the IASB’s new Exposure Draft on pension accounting but the one that will really catch the attention of finance directors and company boards is a new provision to force companies to capitalise the full administrative cost of running a pension, for the full life of the pension, and show that figure in their accounts.

No other cost that is accrued over a multi-year period is capitalised in this way so it is a real oddity. But there we are. Of itself it won’t absolutely kill final salary schemes, but it is another nail in the coffin. Are we better off now as a country? Ask this question in 20 years when large numbers of those employees who have been dumped out of final salary schemes into grossly inadequate defined contribution schemes come to cash their pension pot. All too many will find themselves staring black poverty in the face for the duration of their old age. If we judge change by its effects, how is this good?

Further reading on final salary schemes and pension risk

Tags: final salary pension schemes , FRS 17 , IAS 19 , international accounting standards , pension funds
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