Pension Accounting Change Needed, but not as Suggested

September 4, 2008 ( - Employers believe changes to current pension accounting standards are necessary, but most are not in favor of the changes proposed in the International Accounting Standards Board's (IASB's) preliminary views paper, according to a recent survey by Watson Wyatt Worldwide.

Last week, the Securities and Exchange Commission (SEC) on voted to publish for public comment a proposed Roadmap that could lead to the use of International Financial Reporting Standards (IFRS) by U.S. issuers beginning in 2014 (See SEC Proposes Move to International Financial Reporting Standards ). Watson Wyatt’s survey of 131 finance and employee benefit directors across 17 countries, found improvements to requirements for the measurement of cash balance and similar pension plans are viewed by respondents as most necessary, with eight in 10 employers desiring change in this area, according to a press release.

A narrow majority (56%) agrees with the IASB that pension accounting should change by removing options to defer the recognition of plan gains and losses. However, 80% of respondents do not support the IASB’s suggestion to recognize all plan experience immediately in the profit and loss (P&L) account, one of three options the IASB is considering in this area.

Other proposed changes that are unpopular among employers, according to the survey, 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 – 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 – 53% of respondents find inappropriate and only 24% support.

Employers believe improvements to requirements for the measurement of cash balance and similar pension plans are most necessary, while the IASB has indicated it might make this area a lower priority going forward and instead focus on changes to cost recognition – viewed as less necessary and less appropriate among employers. In addition, according to the press release, 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.

Currently, there is low awareness of the IASB proposal among U.S. employers, with 34% identifying themselves as not at all familiar with the preliminary views paper, Watson Wyatt found. 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 analyzed or quantified the potential ramifications of the proposal on their plans. Forty-six percent indicated they plan to learn more about the proposal and 51% plan to analyze its possible effects by September 26, 2008, the end of the IASB comment period.

Sizeable minorities of respondents said the proposed changes to cost recognition (46%) and to the measurement of contribution-based plans (24%) would discourage them from offering defined benefit (DB) plans in the future.

Copies of the survey report, Accounting for Employee Benefits: Reactions to the IASB's Preliminary Views Paper From Around the World, are available at .