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Pension Benefits that Depend on Asset Returns

Date recorded:

Additional research findings and future direction of the project (Agenda Paper 6)


Following the 2015 Agenda Consultation, the Board added to its research pipeline a project to consider whether to develop proposals to make a narrow-scope amendment to IAS 19 for pension benefits that depend on the return on a specified pool of assets (the reference assets).

Applying IAS 19 an entity uses assumptions about the expected rate of return on the reference assets to estimate the amount of the pension benefits to be paid to employees and applies a discount rate in determining the present value of the estimated pension benefits.

The expected rate of return on the reference assets used to estimate the amount of the pension benefits to be paid to employees reflects the variability inherent in the reference assets. IAS 19 requires a discount rate determined by reference to market yields at the end of the reporting period on high-quality corporate bonds (the IAS 19 discount rate). When the employees can only share in the realised returns of the reference assets, applying the IAS 19 discount rate can overstate the pension liability. This arguably produces information that is not relevant to users of financial statements.

The objective of the research project is to assess whether it is feasible to eliminate the overstatement of the pension liability by capping the expected rate of return on the reference assets used to estimate the cost of pension benefits that vary with asset returns (a capped approach), without changing other aspects of IAS 19. The expected rate of return on the reference assets used would not exceed the IAS 19 discount rate used to determine the present value of those benefits.

In this session, the staff presented the capped approach and its outcomes. The staff analyse in the paper that the issue is pervasive and that one-off costs will have to be incurred to change systems and to provide potential additional disclosures. The staff did not identify cases in which the capped approach would create conflicts with the other requirements in IAS 19.

Staff recommendation

Based on the analysis in the paper, the staff recommended the Board develop a narrow-scope amendment to IAS 19 proposing that an entity estimates the ultimate cost of providing pension benefits that vary with asset returns applying the IAS 19 discount rate, when the IAS 19 discount rate is lower than the expected rate of return on the reference assets.

In the staff’s view, this capped approach:

  • Would improve the relevance and faithful representation of the entity’s obligation in relation to pensions benefits that vary with asset returns
  • Would have an application scope sufficiently pervasive to justify standard-setting
  • Would not involve significant costs for entities that are already applying the requirements in IAS 19 for defined benefit plans

If the Board decides not to develop a narrow-scope amendment, the staff recommends the Board stop this project and consider any further work as part of the Third Agenda Consultation.

Board discussion

Board members had mixed views as to whether the project should be continued or stopped. Those in favour of stopping said that while the solution provided by staff is appropriate to address the issue (although conceptually flawed), the cost of finalising the project would outweigh the benefits. The Board decided to set up the research project a long time ago. The expectation then was that these pension plans would become more relevant over time and therefore the accounting issue would become more pressing. However, it has now been proved that this is not the case. The issue is therefore not widespread and seeks to solve only a small issue within the myriad of issues that IAS 19 brings in general. Furthermore, the Vice Chair warned that narrow-scope projects often discourage the Board from undertaking a more comprehensive review of a Standard. When asked to present preliminary data from the responses to the agenda consultation, the staff said that a majority of respondents have not raised any issues with IAS 19, while of those that have, a majority would classify the issues with IAS 19 as low priority.

Those in favour of continuing the project were concerned that the work the staff has done so far would be lost if the project was stopped. It could be that the issue resurfaces and then the staff would have to continue the work on this in several years. It would be easier and more cost-efficient to finalise the project now. They suggested that the move to an Exposure Draft (ED) was an excellent tool to get feedback from constituents, so the Board can see whether the issue is important or not. The project could still be stopped after the ED was published. The Chairman shared these concerns and said that if the project should be stopped, the staff would need to write a feedback statement that summarises the research so that if the Board were to reactivate the project in later years, they have a good basis to start from.

When called to vote, only 5 of the 12 Board members voted to continue the project and therefore the project will be stopped. All Board members supported the staff recommendation to consider any further work as part of the Third Agenda Consultation.

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