Have pension plans changed after the introduction of IFRS?

Source: De Nederlandsche Bank, http://www.dnb.nl .

Under US GAAP, only individual dc pension plans qualify as dc, whereas collective dc pension plans are still treated as if they are db pension plans. Multi-employer plans are considered dc under US GAAP, as in the Dutch RJ 271.

Swinkels, L. (2006) Zijn pensioenregelingen gewijzigd als gevolg van de introductie van IFRS? Maandblad voor Accountancy en Bedrijfseconomie 80 (11): 562–570.

The Dutch Minister of Justice has informed the Dutch parliament that pension funds should follow the Dutch accounting regulations instead of IFRS (reference letter: 5274274/04/06, March 2004).

Napier, C.J. (2009) The logic of pension accounting. Accounting and Business Research 39 (3): 231–249.

See Napier5 for a discussion on the choices with respect to pension accounting.

Ponds, E.H.M. and Van Riel, B. (2009) Sharing risk: The Netherlands’ new approach to pensions. Journal of Pension Economics and Finance 8 (1): 91–105.

Swinkels, L. (2011) The case for local fair value discount rates under IFRS. Pensions 16 (2): 107–114.

Francis, J.R. (1987) Lobbying against proposed accounting standards: the case of employers’ pension accounting. Journal of Accounting and Public Policy 6 (1): 35–57.

For a more extensive review on pension accounting research, we refer the reader to Glaum.11 Recent trends in international pension provision are described in Barr.12.

Glaum, M. (2009) Pension accounting and research: A review. Accounting and Business Research 39 (3): 273–311.

Barr, N. (2009) International trends in pension provision. Accounting and Business Research 39 (3): 211–225.

Klumpes, P., Whittington, M. and Li, Y. (2009) Determinants of the pension curtailment decisions of UK firms. Journal of Business, Finance and Accounting 36 (7/8): 899–924.

Ali, A. and Kumar, K.R. (1994) The magnitudes of financial statement effects and accounting choice: The case of the adoption of SFAS 87. Journal of Accounting and Economics 18 (1): 89–114.

Klumpes, P.J.M. and Whittington, M. (2003) Determinants of actuarial valuation method changes for pension funding and reporting: Evidence from the UK. Journal of Business, Finance and Accounting 30 (1/2): 175–204.

Mittelstaedt, H.F. (1989) An empirical analysis of factors underlying the decision to remove excess assets from overfunded pension plans. Journal of Accounting and Economics 11 (4): 399–418.

Munnell, A.H., Golub-Sass, F., Soto, M. and Vitagliano, F. (2006) Why are Healthy Employers Freezing Their Pensions? Boston College Center for Retirement Research Issues in Brief 44.

Cahill, K.E. and Soto, M. (2003) How Do Cash Balance Plans Affect the Pension Landscape? Boston College Center for Retirement Research Issues in Brief 14.

Johnston, K., Hatem, J. and Scott, E. (2011) The cash balance plan as a real option: Financial innovation and implicit contacts. Pensions 16 (1): 39–50.

D'Souza, J., Jacob, J. and Lougee, B.A. (2004) Why Do Firms Convert to Cash Balance Pension Plans? An Empirical Investigation. Cornell University Working Paper.

Kapinos, K.A. (2009) On the determinants of defined benefit pension plan conversions. Journal of Labor Research 30 (2): 149–167.

In a publication of KPMG (‘De pensioenwereld in 2006’, October 2005) about 36 per cent of respondents mention to consider moving from a db to a cdc scheme within the next 5 years.

Hoevenaars, R., Kocken, T. and Ponds, E. (2009) Pricing risk in corporate pension plans: Understanding the real pension deal. Rotman International Journal of Pension Management 2 (1): 56–64.

Pension funds that make more prudent actuarial assumptions are allowed to use a lower solvency rate, but never below 100 per cent. Note that this solvency level is comparable to an accrued benefit obligation that the pension fund reports to the Dutch pension regulator and not the projected benefit obligation that is used in pension accounting for the sponsoring company. This 105 per cent is a minimum funding level and the Dutch regulator requires a risk-based target funding ratio that depends on the probability of underfunding within 1 year.

Tinker, T. and Ghicas, D. (1993) Dishonored contracts: Accounting and the expropriation of employee pension wealth. Accounting, Organisations, and Society 18 (4): 361–380.

Tinker and Ghicas25 describe the contracting costs that might be involved when companies breach implicit pension contracts with their employees (when mergers seem to be motivated to capture the pension accounting surplus).

Dixon, A.D. and Monk, A.H.B. (2009) The power of finance: accounting harmonization's effect on pension provision. Journal of Economic Geography 9 (5): 619–639.

The pensionable wage is defined as the actual wage minus a threshold that proxies for the level of state benefits. This threshold is bound by fiscal policy. As an example, consider a person earning €30 000 per year with a €15 000 proxy threshold; a contribution rate of 20 per cent would be €3000 or 10 per cent of the person's wage.

Reiter, S.A. and Omer, T. (1992) A critical perspective on pension accounting, pension research, and pension terminations. Critical Perspectives on Accounting 3 (1): 61–85.

Author's translation of a press release in Dutch by the ANP on 27 June 2005.

Author's translation from the semi-annual report (only available in Dutch).

Author's translation of a concept in Dutch for a collective labour agreement by labour union FNV Bondgenoten.

Thomas, J.K. (1989) Why do firms terminate their overfunded pension plans? Journal of Accounting and Economics 11 (4): 361–398.

Several studies indicate that the stock market has problem valuing pension agreements appropriately; Franzoni and Marin35 and Coronado et al.36

Franzoni, F. and Marin, J. (2006) Portable alphas from pension mispricing. Journal of Portfolio Management 32 (4): 44–56.

Coronado, J., Mitchell, O.S., Sharpe, S.A. and Nesbitt, S.B. (2008) Footnotes aren’t enough: The impact of pension accounting on stock values. Journal of Pension Economics and Finance 7 (3): 257–276.

Note that Swinkels3 describes the switch to defined contribution from 2 out of the 24 most liquid Dutch companies listed on Euronext. The two switching companies are Akzo Nobel and DSM.

We access annual reports from companies and pension funds through http://annualreports.info and http://pensionfund.info .

The maturity is measured by the number of participants and not the size of their pension claim. It is hard to say how the ratio would be influenced if we would take the size of the pension claim into account. Retired employees usually have substantial pension claims, but employees that left the company and did not convert their pension to their new employer might have only a small pension claim with the company.

Amir, E., Guan, Y. and Oswald, D. (2010) The effect of pension accounting on corporate pension asset allocation. Review of Accounting Studies 15 (2): 345–366.

Amir et al40 investigate the reverse causality. They indicate that pension funds increase their allocation to fixed income securities when pension accounting standards move towards fair valuation, both in the United States and the United Kingdom.

Haw, I.-U., Jung, K. and Lilien, S.B. (1991) Overfunded defined benefit pension plan settlements without asset reversions. Journal of Accounting and Economics 14 (3): 295–320.

Haw et al42 indicate that overfunded pension schemes may be settled because of accounting gains and that firms with declining earnings and restricted debt covenants are most likely to do so.