Mooted change to accounting standard 'could see cash contributions slashed'

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A planned amendment to IAS 19 under consideration by the International Accounting Standard Board (IASB) could have big consequences for scheme funding arrangements.

The IASB is debating changes that would make it harder for companies to recognise defined benefit (DB) surpluses on their balance sheets, and affirming there is no unconditional right to a refund for the employer, according to Barnett Waddingham.

This would affect companies whose DB trustees have a unilateral power to wind up the plan or amend benefits.

Barnett Waddingham associate Martin Hooper told PP that the revised standard could see companies recognising additional liabilities if they have agreed a recovery plan.

"Normally, at the end of the life of a scheme, the rules will provide for any surplus in the fund to revert back to the company," he said. "Companies have been using that to justify saying they've got a right to use this surplus.

"But what happens if the trustees have certain powers to stop the scheme getting to the end of its life? For example, if the trustees have a power to wind up the plan, then that would require the surplus to be used to purchase annuities for the scheme, so a surplus will effectively disappear overnight.

"The IASB is looking to clarify that; where trustees have a unilateral power to wind up the scheme, the company won't be able to recognise any surplus in those circumstances, and will also potentially have to recognise additional liabilities where a recovery plan puts them into surplus in future."

Affected companies may have to consider restricting any DB surplus or recognising additional liabilities through losing control of the funds.

"It may make companies less willing to put cash into pension schemes as part of funding negotiations," Hooper continued. "Instead of that, they may look at other non-cash solutions or escrow accounts to try and effectively keep the assets somewhere in the company's balance sheet. If you put cash into a scheme, creating a surplus that you then can't recognise, it is almost akin to writing off the money."

If a company did reduce its contributions so it could continue to recognise these assets, it could impact schemes' abilities to reach full funding on a buyout basis.

Yet, even if trustees do have a unilateral power to wind up the scheme before its end of life by, for example, buying out with an insurer, this is in practice highly unlikely.

"This is something they could actually in practice never do simply because it's very rare for a scheme to be able to afford do that," Hooper said. "You can only buy out benefits in full, effectively, if you get a large sum of money from the company.

"In practice, they don't have this power, but the IASB seems to be more concerned with the theoretical position. It almost seems that the intention is we don't want you recognising a surplus unless it's clear you've got a right to get it back. "

The amendment is currently scheduled to come into force in 2019, although it has yet to be approved by the IASB. Hooper said companies should now take the time to consider mitigating actions.

"See if you can negotiate with your trustees to amend the rules to something more employer-friendly, or to something that actually reflects reality," he said. "Be aware and use the time to consider whether it is actually an issue for you, and if it is, then what your mitigation options are."