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Pension benefits that depend on asset returns

Date recorded:

Project update (Agenda Paper 6)

Background

In this session, the staff provided the Board with an update on the Pension Benefits that Depend on Asset Returns project. This is a narrow-scope research project designed to assess whether the Board can provide a cost-beneficial solution that addresses a measurement inconsistency that arises when applying existing requirements in IAS 19. The inconsistency arises because the variability (risk) in the future asset returns is reflected only in the cash flows and not in the discount rate applied to those cash flows.

The staff have now conducted research into using the ‘capped’ ultimate costs adjustment model. Under the model, the projected cash flows that vary with the asset returns are 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.

The staff set out a number of advantages to this approach including that it will not be a fundamental change and it is simple because it does not require identification of a sub-population of post-employment plans.

The staff propose that the next steps will be to consider whether the new approach will have any unintended consequences and are preparing illustrative examples to compare the accounting outcome under the existing requirements and the ‘capped’ ultimate costs adjustment model. This work is expected to be presented to the Board in Q2 of 2020.

The Board were asked for any questions or comments on the proposals.

Board Discussion

The Board agreed with the direction of the agenda paper and the research into the ‘capped’ approach using illustrative examples.

 

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