Dutch pensions and the financial system

1. Dutch pensions and the financial system Marianne Driessen Budapest, July 5th 2007

2. Agenda • RJ 271 and IAS 19 • Pension Obligation • Notes on international accounting

3. Dutch pensions and the financial system • IFRS: IAS 19 (EU), FAS 87 (US), FRS 17 (UK); • Netherlands: Dutch Accounting Standards, specific RJ 271; • RJ 271 • Before 2005: for DB: DBO only in case of funding deficits or surpluses; • After 2005: RJ 271 based on IAS 19, but adjusted to the Dutch situation; • Applicable on listed firms in the Netherlands • Five different employee benefits.

4. Dutch pensions and the financial system • Most important differences between IAS 19 and RJ 271: • No differences in classification; • RJ 271 has a specification that if a firm is attached to an industrial pension fund (IPF) and has no obligation to complete possible deficits of the IPF , in that case the liability will be treated as a DC- scheme. IAS has not got this specification; • Different possibilities for first time application; • VUT is not pension under RJ 271, only deferred payable benefits.

5. Dutch pensions and the financial system • Classification based on IAS 19: • Defined contribution plans: post-employment benefit plans under which an enterprise pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. • Defined benefit plans: other than DC. • FRS 17 is almost identical, FAS 87 is more strict and specifies that for every individual participant an indiviual account has to be kept on which the contributions and returns have to be paid.

6. Dutch pensions and the financial system • Balance sheet positions for Defined Benefit-schemes • Pension obligation IAS 19/FAS 87 Defined Benefit Obligation (DBO) (-) Fair Value of Plan Assets (+) Funded Status = DBO + Assets Unrecognized Past Service Cost (-) Unrecognized Gains/Losses (-) Prepaid/Accrued Pension Cost = Funded Status + unrecognized items = Balance sheet position

7. Dutch pensions and the financial system • Pension expense (Employer Pension Expense under IAS, Net Periodic Pension Cost under FAS) for DB-schemes is the balance of Service Cost, Interest Cost, Expected Return on Assets and amortisation of unrecognised items. • Service Cost (SC): purchase 1 year service time = DBO/past service. • Interest Cost (IC): needed interest for accrual of DBO = (discount rate beginning of period)*(DBO in period after changes in obligations) • Expected Return on Plan Assets: based on expected return on assets at the beginning of the period during the whole time of the obligation.

8. Dutch pensions and the financial system • Some important notes on international accounting of pensions • First application IFRS/IAS 19 • Multi-employer plans (like a IPF) • Recoverability test: in how far do economic benefits from Prepaid Pension Cost (active position on the balance sheet), have impact on definite balance position. • Additional Minimum Liability (only FAS 87) • Determination of assumptions of pension valuation • Assumptions: discount rates, dismissal risks, disability risks, mortality tables, etc. • Two elementary principles: assumptions reflect the expectations of the firm and continuity of the firm (unless otherwise credible).

9. Dutch pensions and the financial system • Explication of requirements based on international accounting standards In every case: • General description of the pension scheme; • Height pension expense split up by f.e. SC and IC; • Composition of balance sheet position; • Composition Fair Value of Plan Assets; • Including balance sheet position ultimo the year on the balance position primo; • Assumptions; • Deduction method for actuarial gains and losses; • Realised returns; • Additional information on multi-employer plans.