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Breaking Down Barriers: More efficient de-risking of defined benefit pension schemes

by Matthew Bale, Vice-President, Client Solutions, PensionsFirst Analytics

Amid the furore surrounding the negative effect that proposed changes to the international accounting standard for employee benefits (IAS 19) may have on companies’ profit and loss accounts, it is worth highlighting the positive long-term impact, says Matthew Bale, Vice President at PensionsFirst Analytics. The changes will remove a key barrier to the efficient de-risking of defined benefit (DB) pension schemes. 

DB pension schemes – which are used by public and private sector sponsors across the globe – are experiencing major funding volatility and historically-high deficits as they struggle under the mounting burden of protracted pension payments due to increasing life expectancies. Underperforming global stock markets and low interest rates have blasted yet further holes in the funding of many schemes. 

As a consequence, more and more sponsoring companies are looking at ways to transfer unrewarded or unmanageable risks off their balance sheets – in terms of both their liabilities and their investments. Yet there remains a significant barrier to the de-risking of DB pension schemes: the preferential treatment of pension asset returns within sponsoring companies’ profit and loss accounts. A preferential treatment that the proposed IAS 19 accounting standard changes are targeted to tackle.