Proposed changes to the International Accounting Standards Board's (IASB) IAS19 - Accounting for Employee Benefits standard, could undermine the future funding of defined benefit (DB) schemes and heap more pressure on the Pension Protection Fund (PPF), says Occupational Pensions Trusts (OPT).

The IASB is set to move on with its plans to oblige companies to recognise gains and losses on DB schemes in their profit and loss statements, which could result in the scheme adding more volatility to the corporate balance sheet.

Ben Shaw, development director at OPT, said: "Yet this treatment of a company pension scheme doesn't tally with how insurers treat their assets. If an insurance company had to mark to market all of its bonds, many would follow hard on the heels of the banks in the queue for a government bailout, as the value of bonds has slumped."

Shaw said that in contrast, insurers are exempt from this requirement as they hold bonds to match liabilities and retain them to maturity and that since pension schemes hold assets for the long-term they should be subjected to the same treatment.

He added that the IASB, while unconcerned as its remit does not extend to the interests of scheme members, will ensure that pressure is piled onto trustees from their companies to make less volatile asset allocations, producing lower returns.

"This might suggest that companies will have to make up the resulting shortfall by further increasing their contributions into the pension scheme. But the grim reality of a recession means few can afford to do so. More schemes will simply end up in the PPF's lifeboat, with an attendant cut in many member benefits.

"What's more, even fewer companies will want to keep the scheme on the balance sheet and will consider their options for offloading it," Shaw added. "Insurance solutions are expensive - typically a 30 per cent premium to FRS17 - but there are other, more cost-efficient means of moving the scheme off the balance sheet."

Brian Peters, partner at PricewaterhouseCoopers LLP (PwC), is concerned that the changes would mean company's profits vary hugely from year to year. "There is no point imposing a technically robust solution if it is only applicable to pensions and does not include other volatile assets, such as property," he said. "We are not opposed to the amendment but the investor community and businesses alike need consistency to make informed decisions. While the proposed changes are unlikely to be implemented for three or four years, account users should ensure they communicate their views when the proposals reach consultation - otherwise the resulting changes may not be fit for purpose by which point it will be too late to debate," he warned.

- Pensions Age February 2009

Share Story: