The increased number of retirement plans that take a hybrid approach has led to the launch of a research project by the International Accounting Standards Board into the development of new accounting standards.
“Pension schemes are being transformed in a rapid fashion,” said Hans Hoogervorst, chairman of the IASB, speaking Thursday at the National Association of Pension Funds annual investment conference in Edinburgh. He referred to the fact that less than a quarter of FTSE 100 companies offer a defined benefit fund to all employees. “In their place (we are) moving toward so-called hybrid pension schemes. These do not fit neatly into either DC or DB categories in IAS19 (the existing pensions accounting standard). In fact, modern schemes can have infinite variations from the extremes of DC, through to DB, with different degrees and forms of risk sharing in between.”
Mr. Hoogervorst said the “somewhat binary approach” of the current standards “struggles to deal with this new landscape … that is why the IASB has decided to begin a research project to develop an approach to pensions accounting that works for all types of schemes.”
Mr. Hoogervorst also referred to the current low-interest-rate environment, which has led to the onset of new monetary policies around the world, including quantitative easing. Addressing delegates, he said: “Your business model is under severe pressure from unorthodox monetary policies. And to add insult to injury, accounting standards make these pressures visible much more quickly than was the case in the past. But I firmly believe that you are not served by standards that create fake stability and problems over the years.”
Mr. Hoogervorst acknowledged that monetary policy is here to stay, given public and private debt burdens, and added: “Most central banks are fully aware that low interest rates are detrimental to the business model of both insurance companies and pension funds. But I am afraid that they just see it as inevitable collateral damage in the effort to keep the debt burden manageable.”
Mr. Hoogervorst also questioned whether companies should “really be paying dividends when big pension deficits continue to eat away at the balance sheet.”
