1. Recent Developments in Occupational Pension Plan Accounting Working Party on Financial Statistics Paris, 7 October 2003 Juan Yermo, Financial Affairs Division, OECD

2. Key challenges in occupational pension accounting • Identifying employer’s commitments (obligations in IAS parlance) and assets with respect to occupational pension plans (post-employment benefits in IAS parlance since include also health, life insurance, etc) • Valuing employer’s commitments and assets • Reporting employer’s commitments and assets

3. Current IAS19 - IDENTIFICATION • Not only legal but also constructive obligations of the employer. • Employer’s assets are: • right to refunds; • rights to fund increased benefits to current and future employees; • reductions in future contributions, and • right not to fund future losses in the plan

4. Current IAS19 - VALUATION • Pension commitments to be valued: • projected unit credit method to be used for valuing pension commitments; • Discount rate to value commitments based on high quality corporate bond yields of maturity comparable to the plan commitments at the balance sheet date. • Pension assets to be valued at fair value. Discount cash flows should not be used if market values exist.

5. Current IAS19 - REPORTING • In general, unfunded pension commitments in defined benefit plans to be recorded as a pension liability in the employer’s balance sheet. • Actuarial gains and losses (including differences between expected and actual investment return) within a range of 10% of the commitments may not be reflected on the balance sheet. Above this level can be amortised over the working life of employees. But IASB tentatively agreed to remove both the corridor and amortisation. i.e. immediate recognition.

6. Accounting in selected OECD countries • EU countries expected to adopt IAS standards starting 1 January 2005 • UK phasing in FRS 17 gradually since 2001. Immediate recognition of actuarial gains and losses. • US FASB 87 allows DC accounting for multi-employer DB plans. Controversy over proposed replacement of corporate bond by treasury yield as discount rate for cash balance plans and immediate recognition • Germany’s accounting for book reserve systems permits obligations incurred prior to 1987 to be disclosed on footnotes. Discount rates below 6%. New accounting standard (E-DRS 19) similar to IAS19

7. Is it DB or DC from the employer’s perspective? • In countries such as Denmark or Iceland, plans are designed with interest rate guarantees (collective insurance model), but the risk is laid on the pension institution (treated as an insurance undertaking) • In the Netherlands and Switzerland, employer’s commitments not clearly defined. They can be renegotiated (e.g. reduction in guaranteed return in Switzerland, move from final to career-average salary in the Netherlands) and schemes are contributory • In any case, we may need to think of another type of plan, becoming increasingly popular, “defined return”?

8. Further information on OECD work on private pensions • www.oecd.org/daf/pensions • www.inprs.org