The latest version of IAS 19, introduced in June 2011, represents a considerable step towards even greater transparency with respect to pensions. Consequently, companies are likely to take a new look at how they manage pension risk. By reviewing the new elements introduced into IAS 19, we can assess the effects these new standards will have on companies with DB pensions.
The impact on company results
In addition to the direct impact on the balance sheet and profit and loss, pension risk will also be more visible due to the additional asset ceiling test and increased disclosure requirements. This will confront corporate sponsors and investors with their pension risks in a very clear and transparent manner.
How corporate sponsors can take control
Given the profound impact that the new IAS 19 regulations may have, it is important that corporate sponsors are well prepared for these changes. Companies will need to:
- Make an overview of the most important local pension funds and stakeholders
- Calculate the impact of the changed IAS 19 for your pensions
- Talk to your advisors and providers for possible IAS 19 proof solutions
- Decide on the corporate pension budget and redesign pension benefits within that budget
- Agree on pension ambitions and acceptable levels of risk
- Set a timeframe for derisking (if desired), with clear decision points
- Implement communications programme to support the employer and employees.
From black-box to financial reality
Due to the changes in IAS 19, the pensions ‘black box’ has become more transparent. These changes will decrease the smoothing possibilities for corporate sponsors, while they increase the visibility of risks and step up the reporting requirements in order to reveal these risks. Corporate sponsors are not rewarded any more with lower pension expenses by taking more risks. Combined with the current volatile market place, this will increase the speed with which derisking solutions are considered by corporate sponsors.