The International Accounting Standards Board (IASB) has confirmed that it proposes to change the international accounting standard for defined benefit pension schemes (IAS 19) to encourage greater scrutiny of their risks.

Financial consultant Mercer says the proposal, outlined in the IASB's exposure draft on accounting for DB plans, which places both the upside and downside of the risks the DB schemes take outside the profit or loss account, could further encourage companies to de-risk their plans.

"Under the proposals, the profit or loss amounts will be independent of the investing risks taken by the pension plan. This is a big change from the current standard, which rewards holding risky assets to take advantage of a higher expected rate of return - and thus lower expense." commented Warren Singer, UK head of pension accounting at Mercer.

Currently, the expected reward from taking investment risk with plan assets is presented as profit, whether or not it is actually achieved. The proposals would see the actual reward or loss from taking investment risk recognised immediately on the balance sheet, and presented separately to the profit or loss account.

Singer said this change would hope to improve the "decision-usefulness of the profit or loss account for analysts and other users of those accounts. The proposal is a balance between using actual return on assets, which may introduce too much volatility for the profit or loss account to be useful, or using the expected return on assets, which has been criticised for creating artificial profits."

The cost of settling liabilities with an insurance company would also be presented outside of the profit or loss account, as this does not affect the expected future benefit cash flows provided by a DB plan.

However, Aon Consulting is concerned that these changes and the removal of the 'corridor' method would cause "mayhem" and worsen profits.

Sarah Abram, consultant and actuary at Aon Consulting, explained: "Although some of the most unpalatable aspects of the IAS19 proposals have been watered down, they will still have a significant negative impact on many companies.

"For most businesses, our analysis shows that the changes will translate into both lower profits and a worse balance sheet position. This is unwelcome news in itself but the position is made even worse for those who currently use the 'corridor' method.

"Opting for the corridor method currently allows companies to show pension scheme deficits that are heavily 'smoothed,' meaning that the actual scheme experience does not appear in the company accounts. From 2013, however, these companies will no longer have this option and may see dramatic movements in their balance sheet. For those who have it, removing the 'corridor' is bad news."

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