LCP Report: Dutch Pension Deficits Rose in 2010, IAS19 Rules to Increase Liabilities Further

(September 16, 2011) — Dutch pension deficits increased in 2010, according to a report by LCP Netherlands, and new IAS19 accounting rules are likely to heighten Dutch companies’ pensions liabilities even more.

LCP warned that the International Accounting Standards Board’s (IASB) new accounting rules, to be introduced in 2013 – which changes the way pension scheme assets are valued by using mark-to-market accounting on the assumption that this is more transparent – will have a major impact on companies’ reported profits and would have lowered profits by €1.5 billion if applied for 2011. The firm noted that as well as lower headline profits for companies, current pensions disclosures will be insufficient under the new version of IAS19. Additionally, further de-risking into defined contribution schemes and the elimination of IAS19 liabilities from the balance sheet are expected if the “Dutch Pensions Deal” is introduced.

“Pension schemes in the Netherlands are facing significant challenges with the advent of new accounting standards and the possible introduction of the Dutch Pensions Deal, which is likely to have far-reaching consequences for employees, employers, pension funds and insurers,” Jeroen Koopmans, partner at LCP Netherlands states in a release. “Additionally, it’s unlikely that these new standards will signal the end of changes in the way companies account for their pensions obligations, which could increase liabilities further. We estimate that if companies were required to value liabilities on a minimum-risk basis, for example, the increase in value of pension liabilities disclosed on the balance sheets of AEX and AMX companies could run to as much as €50 billion.”

The report shows that in 2010, employee benefit liabilities of the Amsterdam Exchange (AEX) and Amsterdam Midkap (AMX) companies increased from €179 billion to €200 billion, while the combined deficit stood at €25 billion (up from €24 billion in 2009).

Referring to IAS19 accounting rules, a July report by the Organisation for Economic Co-Operation and Development (OECD) asserted that pension funds face numerous challenges and risks. “While bringing further transparency, the adoption of the new rules within IAS19 over the coming years which eliminate the smoothing option will increase volatility in sponsoring companies’ financial statements,” the report stated. “As a result, there will be added pressure to reduce risk in pension funds’ asset holding in order to mitigate volatility and to keep funding ratios more stable than in the past…The trend away from ‘pure’ defined-benefit plans, ‘pure’ (final-salary) DB schemes, which guarantee a certain replacement rate and specify pension benefits according to the employee‟s final pay, length of service and other factors, towards defined contribution arrangements is also likely to intensify.”

Aon Hewitt’s Marcus Hurd also commented on IAS19 accounting rules, asserting: “These changes will affect all companies, producing both winners and losers…For example, two pension funds with the same level of assets, but differing styles of investment strategy could fare completely differently when the revised calculations are introduced. A company with a low-risk investment strategy could see an additional annual profit of £15 million, while another company with a more aggressive return-seeking strategy could incur an additional annual P&L charge of £25 million. In aggregate, the total impact on UK companies could be around £10 billion. These changes will affect companies’ accounting, so they all will need to make an individual assessment and prepare accordingly.”