Should Sponsors Cut Dividends to Close Pension Deficits?

Regulators need to consider whether companies should be allowed to pay dividends while also wrestling with large pension deficits, according to the chairman of the International Accounting Standards Board (IASB).

The IASB’s most recent rules for reporting pension fund assets and liabilities told companies to include the figures under “other comprehensive income” in financial reports. This “avoids potentially huge swings in the status of pension funding from dominating profit-and-loss (P&L) or earnings-per-share numbers,” Hans Hoogervorst said.

“Should companies really be paying dividends when big pension deficits continue to eat away at their balance sheet?” —Hans Hoogervorst, IASBHowever, in a speech this morning at the National Association of Pension Funds’ investment conference in Edinburgh, Hoogervorst admitted that excluding pension numbers from a company’s P&L data “might lead to problems festering too long.”

“Should companies really be paying dividends when big pension deficits continue to eat away at their balance sheet?” he asked. If deficits were revealed in profit-or-loss accounting, the shortfalls would have been dealt with sooner in some cases, he argued.

When pressed by Francois Barker, partner at law firm Eversheds, to answer his own question, Hoogervorst said it was “a bit misleading to investors and also to employees when a company shows hunky dory P&L numbers while a problem is festering in the background. It is at least something that needs to be thought about.”

“In many countries, the public sector pension liability is larger than the debt of the Greek government.”Hoogervorst also used his speech to criticise the accounting standards of public pensions in Europe, warning that in some countries the promises currently being made to public sector workers may not be able to be kept.

“For many countries, the pension liability of the public sector is not recognised or measured at all,” he said. “This lack of proper accounting hides from view a very inconvenient truth: In many countries, the public sector pension liability is larger than the debt of the Greek government.”

Without full disclosure of the extent of public sector pension liabilities, the “inevitable restructurings will probably come too late.”

“Of one thing I am sure: many pensions are not going to be paid as they are currently promised,” Hoogervorst said.

The text of Hoogervorst’s speech is available on the IASB’s website.

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