Pensions - Articles - Changes to IAS 19 accounting standard

Alistair Russell-Smith, Partner at Hymans Robertson responds to the recent changes confirmed by the IASB that from 1 Jan 2019, the pensions interest cost will need to be re-struck based on the surplus or deficit at the date of any curtailment or settlement, rather than remaining based on the balance sheet at the previous year end.

 “This move will lead to more volatile pension costs through P&L for those companies who have a curtailment, such as a benefit change or closing to future accrual, or a settlement event such as a bulk transfer. Just this week the FTSE 350 deficit has increased from £85bn to £95bn over a matter of days due to the market falling. This clearly shows how, with these new regulations, market movements between year-end and the date of curtailment or settlement could materially change the interest cost for a company. A company with a 31 Dec year end that has a curtailment or settlement event now would see a 10%+ increase in their interest cost for the rest of the year under this change. Taking a lower-risk-for-longer approach to funding the pension scheme would stabilise the balance sheet and reduce the magnitude of this accounting volatility.

 “Whilst curtailments are becoming less common because many companies have already closed to future accrual, settlements could become more frequent as companies take action to shrink their accrued DB liabilities ahead of eventual transfer of the risk to an insurer.”

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