EFRP submits response to pension accounting
15 July 2008

Written by Sophie Baker

The European Federation for Retirement Provision (EFRP) has submitted its response on the Pro-active Accounting Activities in Europe (PAAinE) discussion paper on the financial reporting of pensions.

The consultation was launched by the UK’s Accounting Standards Board (ASB) in collaboration with the European Financial Reporting Advisory Group (EFRAG).

The EFRP said that pension liabilities should not be discounted at the risk free rate as proposed in the paper. The Federation believes that the current AA corporate bond rate is appropriate as it reflects that pension liabilities carry some risk. The EFRP also said that future discretionary salary increases should no longer be included in the measurement of pension liabilities for current employees, but that the effect of these should be included in the disclosures in company accounts.

Expected returns, according to the Federation, should continue to be included in financial statements, and better disclosure of how expected returns are derived is a more appropriate solution. Employers in industry-wide plans, such as in the Netherlands, and other multi-employer arrangements where risks are shared, should continue to be exempt from the pensions accounting standard, the EFRP said. The final response from the group was that pension funds need not include the liabilities on the same basis as the sponsoring employers in their own accounts, as each of those accounts serve different purposes.

The EFRP said that they joined the debate because pension funds are substantial investors in European listed equities, and have “a legitimate interest in ensuring that pension liabilities are properly reflected in the accounts of companies in which they invest”.