Belgian pension plan sponsors could face a double-whammy of problems as a result of recent decisions made by the International Accounting Standards Board, a pensions consultant has warned.
Speaking during a meeting of the board's employee benefits working group on 28 April, Aon's Régis Renard claimed a plan to ditch the IAS19 corridor is likely "to create a major catastrophe in the Belgian pensions landscape".
Compounding the crisis, he warned, the IASB board's March decision makes matters worse as it requires businesses to consider future salary increases when assessing whether a benefit promise will attribute higher benefits in later years – so-called back-end loading.
The upheaval facing Belgium’s pension system is as a direct consequence of the board's decision to amend paragraph 67 of IAS19, requiring pension plan sponsors account for the effect of future salary increases, said Aon.
Renard warned the changes mean that Belgium's defined contribution plans will "generate very material provision in the balance sheet…not reflecting actually the economic risk borne by the entities".
Furthermore, the decision to scrap the corridor leaves those entities facing increased volatility in their income statements, he suggested.
Addressing the same 28 April meeting of the working group, IASB member Jan Engström said he and his board colleagues were keen to hear about problems in individual jurisdictions.
"It is important that we assess how big a national problem we have," he said.
That said, the board has already indicated it will not back track on the earlier back-end loading decision, which forms part of its Phase I limited scope review of IAS19.
Under recent Belgian legislation, employers have to give a 3.25% investment return guarantee on employer pension contributions and a 3.75% guarantee on employee contributions.
While they act as DC schemes, these defined contribution plans are accounted for as defined benefit plans under IAS19.
Also commenting on developments, Eric Steedman, senior international consultant with Watson Wyatt, told IPE: "Where plans are more generous later in a career, IAS19 DB accounting has always anticipated and smoothed out the future cost increases while DC accounting doesn't.
"If carried though, the IASB's decision on this grey area of IAS19 will mean that more career average and cash balance plans will now have this smoothed treatment, meaning some cost is recognised earlier compared to a DC plan.”
Steedman also warned: "The decision will not be welcomed by the many plan sponsors around the world who are currently valuing benefits according to how they accrue under the plan formula."
IASB expects to publish an exposure draft of its proposals in the third quarter of this year.
