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聯絡: Alistair Peck
電話: +44 20 7178 3143

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UK
London, 8 March 2010

• Pension schemes likely to adjust asset allocation
• Potential £8.7 billion may be wiped from UK corporate earnings

Proposed changes to international accounting standards (IAS 19), due for consultation shortly, could encourage lower risk investment strategies, according to Mercer.

In particular Mercer believes that, if implemented, the proposal to replace the current form of “expected return on assets” in the pension component of profit or loss would cause many CFOs to revisit their view on the investment strategy for their company pension plans. 

“This proposal effectively means that, in their profit or loss, companies would no longer be automatically rewarded for taking investment risks through their pension plan assets,” commented Warren Singer, UK Head of Pension Accounting at Mercer.  “Currently, a pension plan that is heavily invested in equities will report a higher expected return on assets and a lower pension charge to profit or loss than a plan taking no investment risk - even if the actual return on equities over the accounting period is poor.  The proposed change would mean a removal of this incentive for CFOs to support investment in equities.”

If the proposed change was applied to the accounts of all sponsors of UK pension schemes, Mercer estimates that it would wipe about £8.7bn from annual reported profit or loss (before tax), based on current asset allocations.  This would remove the current boost to profit or loss from the expectation that long-term investment returns on pension assets will be higher on equities than bonds.  In the UK, equity returns have actually underperformed bond returns by around 3% a year over the past decade.

Investment analysts and sophisticated investors are aware of this issue and already tend to adjust for the uncertainty associated with the “expected return on assets” component of pension expense when considering earnings metrics for companies with material pensions risk exposure.  However, Mercer believes that this issue is not on the radar screen of many other investors. 

For companies with material investment in equities, if adopted, the revised accounting standard would lead to a significant decrease in profit.  In contrast, those companies taking little investment risk with their pension assets (such as investing largely in bonds that match movements in plan liabilities) could see an improvement in profit where the IAS 19 discount rate is higher than the returns on assets that they actually hold. 

Under the proposals, actual gains and losses on pension fund assets would be recognised immediately outside the traditional profit or loss measure of earnings, but potentially within a revised format of the statement of comprehensive income.  “This means that investors would need to look beyond the traditional profit or loss measure of earnings in order to understand the risk/reward structure that plan sponsors and trustees have adopted,” commented Mr Singer.

“The proposals, if implemented, will cause CFOs to reassess the pros and cons of the risk taken with the pension plan’s investments,” added David Fogarty, European Head of Mercer’s Financial Strategy Group.

Notes for Editors

After extensive deliberation throughout 2009, the International Accounting Standards Board (IASB) has tentatively concluded at public meetings that the “Expected Return on Assets” and “Interest Cost” finance charges for pensions should be replaced by a net measure of interest income or expense, determined by applying the discount rate to the net defined benefit asset or liability.  The IASB is expected to consult in the next few months as part of an updating of the accounting standard for employee benefits that it anticipates will apply with effect from 2013.

Data issued by the Pension Protection Fund indicates that UK pension schemes have about £870bn of assets at 31 December 2009.  Mercer estimates that these schemes are invested about 50% in equities and 25% in government bonds, with the balance held in corporate bonds, property, cash and other assets.  The reduction to earnings of £8.7bn assumes that UK pension schemes expect corporate bond returns to be 1% p.a. above government bond returns and equity returns to be 3.5% p.a. above government bond returns.  These are close to long-term median assumptions from Mercer’s pension accounting survey data.

At present, if UK pension schemes switched all their assets into low risk government bonds that aim to match movements in liabilities, it would wipe around £17.5bn from annual reported earnings.  Under the new proposals, it would have no direct impact on reported earnings.

Mercer’s Financial Strategy Group offers integrated multi-disciplinary services in pensions risk management.  It works with finance and treasury departments to integrate pension scheme management into the broader financial management of their business.  It also works with trustees to quantify and manage the full range of pension-related risks, including investment and life expectancy risk.

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聯絡: Alistair Peck
Mercer Press Office
電話: +44 20 7178 3143