Marian comments on how the recently announced changes to IA19 may influence behaviour
This is an extract of the text which appeared in the Talking Heads feature of Pensions Week on 4 July 2011
‘The main change being introduced to IAS19 is that the expected return on assets will be calculated with reference to corporate bond yields, rather than the expected return on the assets actually held by the scheme. This will serve to reduce the attractiveness of investing in risky assets, as the expected return from those assets can no longer be offset against pension costs in the company accounts. Whether this will filter through to a change in investment strategy for many schemes remains to be seen. The impact on company accounts is but one of myriad considerations companies and trustees navigate when determining a suitable investment strategy.The financial crisis and subsequent market recovery has meant many schemes have already reduced the level of risky assets held, while many others are entering into a long-term period of gradual derisking. A knee-jerk change in investment strategy as a result of a change in accounting standards seems unlikely.
The second change relates to the way in which experience gains and losses are allowed for each year.As these often even out over time, companies were previously allowed to defer recognition of experience items comprising up to 10%of the assets or liabilities. This ‘corridor’ option is being removed, which will lead to more volatility on company balance sheets. The change in behaviour driven by the removal of this option is likely to be minimal. Many companies do not use the corridor approach and most analysts already adjust the figures to allow for the full actuarial gain and loss.’
Stricter Rules for IAS19
Marian comments on how the recently announced changes to IA19 may influence behaviour
This is an extract of the text which appeared in the Talking Heads feature of Pensions Week on 4 July 2011
‘The main change being introduced to IAS19 is that the expected return on assets will be calculated with reference to corporate bond yields, rather than the expected return on the assets actually held by the scheme. This will serve to reduce the attractiveness of investing in risky assets, as the expected return from those assets can no longer be offset against pension costs in the company accounts. Whether this will filter through to a change in investment strategy for many schemes remains to be seen. The impact on company accounts is but one of myriad considerations companies and trustees navigate when determining a suitable investment strategy.The financial crisis and subsequent market recovery has meant many schemes have already reduced the level of risky assets held, while many others are entering into a long-term period of gradual derisking. A knee-jerk change in investment strategy as a result of a change in accounting standards seems unlikely.
The second change relates to the way in which experience gains and losses are allowed for each year.As these often even out over time, companies were previously allowed to defer recognition of experience items comprising up to 10%of the assets or liabilities. This ‘corridor’ option is being removed, which will lead to more volatility on company balance sheets. The change in behaviour driven by the removal of this option is likely to be minimal. Many companies do not use the corridor approach and most analysts already adjust the figures to allow for the full actuarial gain and loss.’