In preparation for the adoption of the revised IAS 19 accounting standards, many scheme sponsors should be aware of the increased focus likely to occur around the issue of defined benefit risk according to Mercer. The consultancy has highlighted five key areas of impact for DB risk management.

The revised IAS 19, due to be endorsed by the EU, will require more disclosure on the risks faced by companies and highlight any risk reduction measures taken.

Mercer’s UK head of pension accounting Warren Singer said: “There are already comments from equity analysts that this will lead to an increased focus on the risks posed by DB plans. Questions are being asked about the impact on cash contributions of the next round of funding valuations, especially if there is any further adverse market experience in the current low bond yield environment.

“Given that reported profits will no longer be automatically rewarded for holding equities rather than bonds, the new IAS 19 and the footnote disclosures may cause plan sponsors to re-evaluate their approach to DB plan risk management.”

Mercer has stated that there should be a focus on longevity risk and management, and pension increase exchanges should help to achieve more certainty in future cashflows. In addition, the consultancy has also stated that in order to focus on DB scheme risk transfer, “the accounting implications of a buy-in are generally more attractive than a full transfer via a buyout”.

Routine benefit payments do not need to be accounted for as settlements concerning DB scheme liability management, and another effect would be improved comparability with the removal of the 'expected return on asset' assumption.

Finally, Mercer underlined that companies that have historically used deferred recognition and have large unrecognised losses will face a step change in their balance sheet position.

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