Educational session—Illustrative examples (Agenda Paper 6)

In January 2020, the Board received an update on the research project on Pension Benefits that Vary with Asset Returns. The Board agreed that it would be helpful to develop examples to illustrate how the proposed capped approach would apply and how the accounting outcome of the capped approach would compare to the outcome of the existing requirements in IAS 19 for defined benefit plans with benefits that vary with asset returns.

Under the capped approach, the projected cash flows that vary with the asset returns would be capped so that they do not exceed the discount rate specified under IAS 19. The cap would apply only to the benefits that vary with the level of returns on specified assets. If the plan provides other benefits, such as coverage of medical costs, these other benefits would be measured using the general requirements in IAS 19.

The paper analysed the functionality of the capped approach on an illustrative example.

Staff recommendation

Given the educational nature of the session, there was no staff recommendation. The staff asked whether Board members had questions on the paper and whether there are other fact patterns that the Board recommend investigating to assess whether the capped approach could have unintended consequences.

Board discussion

Board members thought this was a challenging issue. A member asked the staff to think about the scope because they see this as addressing a narrow population of plans. One member said that IAS 19 is getting more difficult to maintain, so they need to think about longer term plans for the Standard rather than investing too heavily now. The member also wanted to get a better understanding of the cost of separating the true up, and although the member does not want to use OCI, it might be easier to include the true-up with the rest of the measurement recognition. A staff member said they considered solving this by adjusting the discount rate or the cash flows and concluded that adjusting through the cash flows is more fruitful, and that the presentation of the true-up is a consequence of taking that approach.

Another Board member said that because this is an exception to IAS 19, the Board needs to be careful that it does not cause unintended consequences. That member also suggested that the staff undertake some robustness checks to assess the outcomes from different return profiles.