New guidelines for pension surpluses
New guidance on how pension fund surpluses are treated on company balance sheets could have significant implications for the way employers view pension funding and investment risk and, ultimately, for how pension funds are invested in the future, according to Mercer Human Resource Consulting.
The International Accounting Standards Board has issued new guidelines on the accounting standard used by all Irish plcs for pension fund accounting.
These guidelines curtail the circumstances in which a company can take credit in its financial statements for a surplus in its pension scheme.
With effect from January next, 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.
Movements in financial markets since the beginning of 2007 have seen pension funds make substantial gains to the point where many schemes would now be in surplus.
Liam Quigley, head of Mercer’s Financial Strategy Group in Ireland, said: “This change in accounting rules will encourage many companies to consider the extent to which their pension plans take investment risks.
“In some situations, the case for taking any future investment risk may well be eliminated.
“The new guidelines are likely to accelerate the recent worldwide trend we’ve seen to de-risk pension fund investment strategies.
“On an accounting basis, many company schemes are now fully funded and a good number of others are nearing that position. In future, companies may want to re-direct their investments from equities to bonds as any visible economic benefit of accumulating surplus assets may be lost.”
Mr Quigley observed: “Finance directors and treasurers, particularly of companies with mature pension plans, should consider the impact of these rules on their profit and loss accounts, balance sheets and funding policies as a priority.
“The new interpretation comes into force as a mandatory requirement for annual accounting periods starting from January 1, 2008.”
