The FINANCIAL -- In a new position paper produced as a response to the proposed revision to IAS 19 by the International Accounting Standards Board (IASB), EDHEC has shown that the immediate recognition of the volatility of pension surpluses and deficits in the profit and loss accounts of the sponsor may lead pension funds to shed risky assets.
According to EDHEC, the IASB proposal gives pension funds no incentives to manage risk properly; instead, by suggesting that pension assets and liabilities can be considered held for trading, pension funds are given incentives to shed these liabilities.
The author of the report, Samuel Sender, Applied Research Manager with EDHEC-Risk, puts forward the following arguments in this position paper:
EDHEC firmly warns the IASB against the temptation to suppress the corridor approach, whereby actuarial gains and losses which fall within a corridor need not be recognised, as this would lead to a significant reduction in holdings of risky assets in pension funds.
EDHEC supports smoothing market yields as a way to filter out market noise.
EDHEC also supports the amortisation of pension surpluses and deficits, in a manner consistent with the general treatment of long-term assets and liabilities.
Finally, EDHEC recommends that pension funds use the projected benefit obligation to compute pension cost but that they report the accrued benefit as the pension liability in their balance sheet, a measure that would then be consistent with the prudential measure of pension liabilities.
This study was produced by EDHEC-Risk as part of the AXA Investment Managers ‘Regulation and Institutional Investment’ research chair.
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