IAS 19 to Reduce UK plc Reported Profits

 17 June 2011 (PLANSPONSOREurope.com) - According to a recent press release, while the revised pensions accounting standard will increase transparency, it is also expected to reduce UK plc reported earnings by £10bn.  

The International Accounting Standards Board (IASB) has issued its revised pensions accounting standard IAS 19, Employee Benefits (see IAS 19 May Encourage Pensions to Reallocate Assets). According to the release, some of the changes are expected to have implications beyond financial reporting. 

In what is perhaps the biggest change for most UK companies, the current expected return on plan assets income statement credit will be replaced with a credit based on interest on the plan assets at the AA discount rate. In current market conditions, expected returns for a typical pension plan portfolio can be roughly 1% higher than AA discount rates, claimed the release. Based on UK plc pension assets of around £1,000bn, this is expected to dent UK reported profits by nearly £10bn.   

Mike Smedley, KPMG pensions partner, said: “The changes are overall broadly welcome from a financial reporting perspective.... From a pension scheme governance point of view, the change to the expected return on assets removes one of the incentives to invest in higher yielding asset classes, so may lead to some reconsideration of investment strategy, whilst the disclosure of scheme expenses may lead CFOs to question why their running costs are higher than for seemingly comparable businesses.”