Pension Accounting Rule Changes May Discourage Surpluses

July 10, 2007 ( - A press release from Mercer Human Resource Consulting warns that new guidance on how pension fund surpluses are treated on company balance sheets could have serious implications for the way employers view pension funding and investment risk and for how pension funds are invested in the future.

According to the announcement, the International Accounting Standards Board issued last week new guidelines on IAS19 , the international accounting standard on pension fund accounting.   The guidelines say companies can only take credit for a pension fund surplus if they have the “unconditional” right to a refund of the surplus or if they can use it to reduce future employer contributions.

The greatest impact of the new guidelines will be felt in countries with strong minimum funding rules, such as the UK, where many companies and trustees are discussing setting a funding policy and investment strategy which aims to accrue assets over and above the current IAS19 accounting liability. The new guidelines will effectively require these companies to account for liabilities at the higher agreed funding target, meaning any funding surplus will disappear, Mercer said.

“In some jurisdictions such as the U.K., the case for taking any future investment risk is being greatly eroded. The new guidelines are likely to accelerate the recent trend we’ve seen to de-risk pension fund investment strategies,” said David Fogarty, a worldwide partner in Mercer’s Financial Strategy Group, in the release.

Fogarty added that companies may redirect their pension investments from equities to bonds in the future as there will be no advantage to accumulating surpluses. Fogarty urged companies to consider the effects of the mandate on their profit and loss accounts, balance sheets and funding policies.

IAS19 goes into effect for accounting periods beginning January 1, 2008.