Matthew Haigh
ACCOUNTING’S ROLE IN PROVIDING FOR LIFE AFTER WORK
Correspondence:
Associate Professor Matthew Haigh,
Department of Business Studies,
Aarhus School of Business,
Aarhus University,
Fuglesangs Allé 4,
Aarhus V,
8210 Denmark.
Fax: +45 89 48 66 60.
E-mail address: haighmatthew@yahoo.com.au.
Prepared for the ILPC conference, Edinburgh, 2009.
ABSTRACT
Accounting standard setters have asserted and denied connections between the public interest
and the reporting of employer-sponsored pension plans. Recognition of the public interest
involves a real and apparent contribution to the idea of the public. For accounting standard
setters, this rests on a capacity to contribute to the type of political economy to which the
profession would claim its strongest commitment. Hence we see pensions reporting justified
using assumptions about frictionless markets and, in particular, statements of the usefulness
of reporting a marketised value. Other values are imbricated in private pension plans.
Members project socialised economic expectations, liberal governmentalities inject a hopedfor release on the public purse, while investment consortia are on the lookout for
unrecognised financial value. A shift of perspective made to include these concomitant values
reveals an unwanted antagonism of representation according to fitness for trading. The model
has been used to shape rather than to reflect realities. Sponsors have withdrawn their support
from pension plans, which by promoting a transfer of the social security burden to the state,
has detracted from an important ideal of the profession and its credibility in the business
community.
ACCOUNTING’S ROLE IN PROVIDING FOR LIFE AFTER WORK
1. INTRODUCTION
As the calculative technology of accounting continues to gain in importance in so many
spheres of social life, an understanding of the conditions and consequences of such a
calculative technology is vital (Miller, 1994, p. 3). Accounting’s acquittance of the
obligations it owes its ‘moral employers’ (Cooper, 2005, p. 596) hinges on a capacity to
contribute to the type of liberalist political economy to which the profession claims its
strongest commitment (Willmott, 1990). The techniques that standard setters have determined
appropriate to measure and report employer-sponsored pension provision are those that
would facilitate efficient capital markets. According to standard setters, this is the best way to
serve the public interest. The reporting requirements have brought reductions of pension
benefit levels, corollary outcome of which has been to transfer the welfare burden onto public
systems. Such seemingly perverse outcome provides useful information on the location of the
public interest in accounting requirement.
The management of pensions arrangement is of some transnational political importance.
Demographic changes have required actuarial adjustments to assumptions of the longevity of
populations (Disney, 2000). Countries are urged to find ‘strong financial incentives to carry
on working and existing [in which] subsidised pathways to early retirement have to be
eliminated’ (OECD, 2006). Guarantees of social security using unregulated, private means of
governance in which primary consideration is cost have proved difficult to maintain (Held,
2000). Eleven OECD countries operate mandatory employer-sponsored pensions as substitute
for and supplementation of public pension provision[1]. These countries have adopted a
position, to varying degrees, that the effective maintenance of private pensions requires
structural adjustment to global capital (and occasionally labour) markets. Agents of states
have turned to the actuarial and accountancy professions. ‘Adopt International Accounting
Standards’ (Regulation 1606 of the European Parliament) and value relevance for potential
investors in plan sponsors (Hann et al., 2007) have become catchwords before modernisation
(EU Directives 43 and 51), integration (OECD, 2007a), single passport (The Pensions
Regulator, 2007a), convergence (Lamfalussy, 2000a), smooth functioning (Lamfalussy,
2000b) and regularised monitoring (Thornton, 2007). By fiat, one type of pension plan,
defined benefit arrangement, in which the sponsor promises a predetermined amount to its
members, has been represented as expensive and risky for the sponsor. Sponsors have sought
to replace the defined benefit with accumulation arrangements in which contributions
invested directly, together with investment returns arising from the contributions, determine
the amount of the post-employment benefits received. Accounting requirement for
accumulation arrangement is much less extensive as relevant investment risks are transferred
to plan members who, assumedly, have less need for reports of investment and actuarial
assessments of their plans.
At consideration in this paper is how the reporting treatment of employment-related pension
plans in the US, UK and Australia might provide for the efficiency of capital markets (rather
laudable goals and an objective of standard setters), articulate with national pensions policies
and so serve as a vehicle for the accounting profession (both in the narrow sense of standard
setting bodies and the wider sense of ‘accountants in practice’) to acquit its public interest
obligations.
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The paper uses both traditional and critical research paradigms. An objective common to the
more traditional research conducted in capital markets, in pensions policy development and,
to a lesser extent, in professional public interest obligations is ‘promotion of the
rationalisation of society by being purposive, ... developing productive forces, [and]
increasing technical mastery over nature’ (Benhabib, 1986, p. 230). In this tradition, value
relevance of reporting of financial items becomes expressed in terms of, for example, ‘the
association between financial statement measures and equity investors’ future cash flow
expectations [… ] as proxied through stock prices’ (Hann et al., 2007, p. 329). (Conventional
treatment in conventional capital markets research is to draw large samples of financial
statements of quoted companies over a relatively short period.) Usefully, this tradition
addresses those aspects of accounting treatment whose acceptability is not decided and points
at the political nature of standard-setting processes.
A critical theoretic approach is used to give credence to the structural conditions of pensions
accounting treatment that in the usual case will escape consideration. Justification for a
critical approach is found in much of the argument expressed in Willmott (1986, p. 556):
However, at present, accountancy continues to be graced by a public image which, in
stressing its technical, esoteric qualities, underplays the social and political formation of
its practices and standards. ... The present paper ... reflect[s] the view that the
organisation of the profession cannot be adequately understood independently of an
appreciation of the political, economic and legal circumstances that have supported and
constrained its development.
A policy paradigm, in the framework expounded by the political scientist Peter Hall (1993),
is constituted by an overarching set of ideas that specify how the problems facing
policymakers are to be perceived, which goals might be attained, and what sorts of techniques
can be used to reach these goals. Hall emphasises that all policy paradigms operate
ideologically. An example is public pensions policy, where the ideological underpinnings of
the idea of the public pension are found in the liberal welfare state, in which the policy goal
might be to ‘alleviate the financial problems of the elderly’ part of the population no longer
working, the policy instrument used ‘might be an old age pension’ and the instrument’s
setting would concern the benefit level and its delivery (Hall, 1993, p. 278). Hall’s
interpretation of policy development is used in a reading of Slavoj Žižek’s revival of
dialectical materialism. Žižek (2006, pp. ix-x) seeks to ‘revive a practice of reading which
confronts a classic text, author or notion with its own hidden presuppositions’ so as to reveal
its ‘disavowed truth’. Using the contextual notion of parallax, which is defined in quantum
mechanics as the apparent displacement of an object caused by a change in observational
position, Žižek sees the dialectic as a way to comprehend conflicting perspectives whose
existence necessarily binds them together. Parallax refers to a social (or political, or scientific
...) duality in which two perspectives that seem incommensurate reveal themselves, on
analysis, to be composed of the same material.
Thus there is no rapport between the two levels, no shared space—although they are
closely connected, even identical in a way, they are, as it were, on the opposed sides of
a Moebius strip. (Žižek, 2006, p. 4)
Objective of analysis using the idea of parallax becomes identification of a ‘minimal
difference [between rhetoric and reality] and which divides one and the same object from
itself’ (Žižek, 2006, p. 18). Structural asymmetries are revealed by identification of
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constitutive opposites. Parallaxes are shown between the public interest ideal—as
encapsulated in accounting’s ‘conceptual framework’ and its supporting ideas of
representational faithfulness and a true and fair view—with the social potential, depth of
promise, and burden of the private pension. The text used is pronouncements about private
pensions as appearing in legislation and issued by regulators, and contested between the
accountancy, investment analysis and actuarial professions. National statistics of changes in
private pension schemes are used to identify the social outcomes of such pronouncements.
The paper proceeds in five sections. The next section justifies and outlines the method of data
collection. A following section identifies the location of the public interest in the reporting
requirements imposed on private pension plans. This is followed by a section which identifies
and interprets the competition between the accountancy, investment analysis and actuarial
professions for control of policy setting. A penultimate section discusses the real effects that
accounting has brought to post-employment cessation benefits. A final section considers the
problems that accounting standard setters face in the representation of social and economic
realities, here problematizing accounting bodies’ constitutive allegiances and the wider
implications this has for the contribution accounting practice might make to social security.
2. DATA COLLECTION
The United States, United Kingdom and Australia were chosen for their mature, large and
lightly regulated pension systems designed to supplement public pensions[2], the relatively
high equity allocation in investment portfolios held by their private pension schemes, making
them subject to many of the same policy-setting risks, and the pressure that ageing
populations in these countries has brought on funding requirements (Disney, 2000). The
exploration of the connections between pensions accounting and the professional public
interest is based on a meta-analysis (Guthrie et al., 1991) of three different types of
documents, the first of which comprised the scientific or academic literature. Here we
examined roughly 120 reports, books, and papers issued by associations, think tanks, and
academics and dealing with the topics of pensions governance and pensions accounting. The
documents were located using online research databases (the main keywords being simply
‘pensions’, ‘accounting’, ‘employee benefits’, ‘actuarial’ and ‘fair valuation’) and the three
predominant genres of informal scholarly communication on the internet, namely, mailing
lists, scholarly homepages, and scholar-produced decentralised digital resources (Fry & Talja,
2007). Documents came from accounting, actuarial studies, corporate governance,
demography, economics, finance, geography, legal studies, political science, public
administration, and sociology.
The second type of data comprised the pronouncements made and analyses provided by the
many organizations involved in private pensions. The rhetoric of pronouncements and other
evidences of history are important in an account of the linkages of social practices (Partner,
1977). Organizations sourced included the International Organization of Pension Supervisors,
International Organization of Securities Commissions, the Basel Committee on Banking
Supervision, the so-called Lamfalussy Level 3 networks[3], the UK Department for Work
and Pensions and Financial Services Authority, as well as others. Lobby groups and
professional associations were accessed and included the International Forum of Actuarial
Associations, the OECD’s International Network of Pension Regulators and Supervisors and
Private Pensions Working Party, and the UK’s Pensions Policy Institute, Age Concern
England, Association of British Insurers, Confederation of British Industry, National
Association of Pension Funds, Trades Union Congress, The Pensions Regulator, Pensions
3
Commission, and Institutional Shareholders Committee. Another data source used was media
outlets such as Investment & Pensions Europe, and Pensions Funds Online. This second data
set comprised just over 400 pages of website material, not including the reports or documents
to which these organizations’ websites are linked.
A third type of data comprised the commentaries and pronouncements of major accounting
and actuarial bodies. Sources included the International Accounting Standards Board,
European Financial Reporting Advisory Group, International Federation of Accountants,
American Society of Certified Practicing Accountants, the Institutes of Chartered
Accountants in England and Wales and in Australia, the UK’s Faculty and Institute of
Actuaries, the Financial Reporting Councils of the UK and Australia, and the Australian
Accounting Standards Board. Documents included proposals and exposure drafts of
accounting standards and actuarial guidance notes, and articles published in professional
journals and websites. This material amounted to just under 1,000 pages, not including the
reports or documents to which these organizations’ websites are linked.
3. LOCATING THE PUBLIC INTEREST IN PENSIONS REPORTING REQUIREMENT
The public interest as a normative theory is consistent with the notion of the common good as
it was originally identified in the 17th century—to enhance the common good rather than
private interests. This view is consistent with the concept of the common good bound in the
welfarist state (George & Wilding, 1994). Therefore according to the normative perspective,
a policy or action is in the public interest if it advances the collective welfare of the public
(Oppenheim, 1975, p. 265). An abolitionist view of the public interest sees no interests in the
public and only diverse groups each with their own particular set of interests and goals
pursued in the absence of consideration to others (Cochran, 1974). In this view, the public
interest is an orientation toward the maximisation of private interests within the constraints
imposed by organised society (Dellaportas & Davenport, 2008).
The ideas of retirement provision and the public interest in accounting pronouncement both
reference the idea that the liberal welfarist state is the best conduit for economic and social
welfare. The public interest, impartiality and integrity have been ranked with value to
investors (Francis & Schipper, 1999), transparency of reporting to investors (Barth et al.,
2008; Sapra, 2008) and provision of information useful in assessing the stewardship of
managers (Barlev & Haddad, 2003). The relevant public in the actuarial measurement of
pensions is held as ‘consulting clients, employers, lawyers, accountants, policymakers and
regulators ... investors, policyholders, pension scheme members, employees and
beneficiaries’ (Financial Reporting Council, 2009). Accounting’s public interest in private
pensions appears more nebulous. Argument has appeared that the relevant public in pensions
reporting includes investors and might extend to pensions scheme members (see,
International Accounting Standards Board, 2006a; OECD, 2007b). To better specify the
location of accounting’s public interest, it is helpful to sketch the institutional arrangements
(Gallie, 2008) of private pension schemes. Figure 1 below gives the oversight arrangement in
the US, UK and Australia.
[insert point for Figure 1]
The relative emphases placed on accounting’s core values of representational faithfulness,
reliability, relevance and comparability can indicate the type of public interest being served
(Willmott, 1990). The values underpinning pensions accounting have been caught up in the
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concept of fair valuation. A trend toward recognition of fair-valued measurements for
financial items begins from 1976 in the US, following the passing of federal legislation that
governed the minimum funding requirements for an employer-sponsored pension scheme and
the maintenance of the ratio of plan assets to accrued liabilities. Under accounting
standards[4], an entity offering a pension scheme of a defined benefit type must calculate
how much it will have to pay in future pensions, discount those payments to the present,
deduct the market value of plan investments, and report the result as either a liability or asset
in its statement of financial position. Fair value applied to an asset purchased by a pension
fund means a current exit price—a price referring to that relevant to a hypothetical seller of
an item reported or used in the valuation of an item reported in the statement of financial
position (Financial Accounting Standards Board, 2007).[5]
In line with the dividend-discounting valuation model which posits a connection between
quoted prices and accounting numbers, accumulated benefits payable under a DB plan are
discounted when the measurement date extends beyond the reporting date. The calculation
uses the Projected Unit Credit Method, which uses prescribed mortality tables (as issued by
national public actuaries) and discount rate, and takes into account other assumptions
concerning final salaries, employee turnover and medical cost trends, possibility of future
pension increases if benefits are indexed with general price changes, and any other variable
that will influence the cost of the benefit. The result is the present value of the total DB
obligation. A discounting requirement appeared after a Financial Accounting Standards
Board-initiated review in 2005 of pensions reporting. That review pointed to two benefits of
pensions reporting, namely, reporting transparency and measurement appropriateness. Some
evidence then is provided of the public interest in pensions accounting being located with
investors.
Representation of DB arrangement as expensive and risky and of accumulation arrangement
as the only other possible alternative is claimed to supply transparency to investors. The
claim is made by connecting stewardship and an assumed link between equity prices and
reported performance.
[Because investors believe that] fair value is grounded in economic reality, [fair value]
facilitates informed investment decisions, which ultimately strengthens our capital
markets. (Financial Accounting Standards Board, 2008)
The fairness in use of values ascribed to the capital markets derives from the parity of
information as used by a willing buyer and willing seller (Bradbury, 2008). The claim of
measurement appropriateness is supported by argument that as the sponsoring entity will bear
the actuarial and investment risks associated with a DB plan (i.e., the risk of an unfunded
plan), the entity should report that risk. The funded status is measured as the difference
between the fair value of plan assets and the projected DB obligation. Funding requirements
calculated under the Projected Unit Credit Method are expected to maintain the pension fund
assets at such a level that, with future investment income but without any future
contributions, the fund will be able to pay all accrued benefits until the last plan beneficiary
dies (OECD, 2007b). Due to the method of calculation, the absolute value of the
gain/expense under DB arrangement might be greater than produced under an accumulation
scheme of similar size and asset composition, and less predictable[6]. It appears then that the
public interest in pensions reporting encompasses two groups. Fair valuation is relevant
because (a) it brings transparency and appropriateness to a potential investor in a firm and (b)
supplies information on funding adequacy to a member of a pension plan.[7]
5
An assumption underlying the requirement of pensions reporting standards is that the value
yielded is relevant to a hypothetical seller (e.g., Financial Accounting Standards Board,
2006b) (i.e., an investor considering its options). This is a different type of user from that
which has been used to justify financial reporting for pensions. The Accounting Standards
Board (2008, Ch. 11: 2.1) sees a need for pensions accounting stemming from assumed need
of plan beneficiaries to assess the sponsor covenant. The UK actuarial standard setting bodies
have commented in several places that a different amount to the amount yielded under
financial reporting standards may be relevant for purposes of assessment of the strength of
the sponsor covenant. Actuarial Guidance Note 36 Accounting for Retirement Benefits under
Financial Reporting Standard 17 (Financial Reporting Council, 2006b) explains the
differences to liability valuation produced under the two sets of requirements.
The aim of a valuation is to crystallise an amount which can be applied to a transaction
or recorded in a formal document, whereas the aim of planning is to arrive at a
provisional amount for budgeting or target-setting purposes. (Board for Actuarial
Standards, 2008)
The planning amount, determined jointly by the plan’s consulting actuary and the sponsor,
concerns funding assessments and as such is influential in the maintenance of the sponsor
covenant. The assumptions appropriate to the accounting amount, namely, ‘for the purposes
of a transaction’ (Board for Actuarial Standards, 2008, clause A.9), are not those that would
promote maintenance of the sponsor covenant.
Accounting standards setters have added to recognition uncertainty by announcing a series of
changes to the bases of valuation. Discounting uses a stipulated rate which is chosen by
reference to current conditions in the markets for used by an organization to source debt
capital. SFAS 158 originally equated the discounting rate to the four-year weighted average
yield on 30-year US Treasury bonds. FASB requirement has since reflected the treatment
mandated by the IASB, which, following prescription in the UK’s FRS 17 Retirement
Benefits, gives the discount rate as current yields on high-quality corporate bonds in cases
where there is a large market in corporate bonds. (FRS 17 allows UK companies to value
pensions liabilities use AA-rated corporate bond yields, which are generally higher than the
British standards setter’s proposal in 2008 to use a lower rate such as that attaching to indexlinked UK government bonds). The Australian standards setter has changed the discounting
rate stipulated on three occasions since 2004.
To reiterate, accounting standard setters have claimed that the reporting requirements for DB
schemes are designed to meet the needs of plan members[8] (e.g., The Institute of Chartered
Accountants in Australia, 2006). The calculation of DB liabilities, which represents pension
plans by how much they might fetch in an auction, suggests that accounting has prioritized
the assumed purposes of potential investors over those of plan members. The history of
pensions reporting and certain anomalies in pensions reporting requirement point at ‘an
insistence on compromise, on negotiation, on piecemeal “democratic” reform, [which] has
long been the privileged vehicle for the reproduction and reinforcement of the status quo’
(Žižek, 2006, p. 322). The current piecemeal reporting requirements belie standard setters’
claim of representational faithfulness[9]. In 2007 and 2008, widespread market instabilities
were associated with increased volatilities in corporate bond yields and declines in the value
of equity investments held by pension funds. Sponsors holding DB schemes in this period
could use increases in corporate bond yields to offset asset losses in asset portfolios and
include the result in corporate income. As instance, BT (British Telecom) reported a GBP600
6
million surplus after tax in its defined benefit schemes in the September quarter of 2008. The
surplus was comprised of a decrease of quoted value of assets owned by BT’s plans (GBP2.9
billion), which was offset by the relatively (and unusually) high yield offered by the iBoxx
fifteen-year index (7.25 percent) used to discount BT’s pension obligations. In the name of
representational faithfulness, international financial reporting standards have allowed
profound decreases in the values of assets purchased by schemes to be represented as
reductions in payment obligations and realised gains.[10]
A public interest constructed of a different public according to the item under measurement
surely cannot describe accounting’s highest ideal. The Public Interest Oversight Board was
formed by regulators in 2005 following concerns that the credibility of the accounting
profession had been compromised by the financial scandals of the early 2000s[11].Fair
valuation, apparently on the basis of its status as a measurement basis of various types of
financial assets, has been connected to regulators’ concerns of capital market stability and
hence to an international-styled public interest ‘inherent’ to audit practice and financial
reporting, ‘a broad and evolving concept that requires continuous engagement with many
entities in the international environment’ (Public Interest Oversight Board, 2008). Entities in
the Board’s sights are those ‘that endorse and support its mission’ and ‘other international
entities that have explicit public interest goals’ such as the Forum of Firms (a network of
public accounting firms with transnational audit clients), International Association of
Insurance Supervisors, Committee of European Securities Regulators, Financial Stability
Forum (a network of financial regulatory authorities) and the International Organization of
Securities Commissions (IOSCO), from which PIOB’s inaugural Chairman and another
member have been drawn. Such entities indicate accounting’s public interest is selective, and
necessarily abolitionist. The reporting values claimed in support of the public interest
objective are ‘transparency, proportionality and comparability’, taken to refer collectively to
cross-border confidence of, impliedly, regulators and investors. Accountants are expected to
use ‘increasingly principles-based standards’ so as to ‘promote the needs of the public’,
namely, clients of accountancy services, in areas ‘where the actions of a profession can
improve or harm the common wellbeing’. Standard setters have not deigned to identify
common wellbeing.
4. A HISTORY OF PROFESSIONAL COMPETITION FOR FAIR VALUE
The evolution of pensions reporting treatment has followed a different path from the original
purpose of modern financial reporting to manage social relationships between providers and
management of capital (Bryer, 1993). Accounting standard setting bodies have used and
developed the initiatives and pronouncement of actuarial, investment analysis and other trade
associations to promote fair valuation reporting and to promote itself. The emergence and
development of professional accountancy bodies, as argued by Willmott (1986, pp. 556, 558),
has relied on political processes ‘whose purpose is to define, organise, secure and advance the
interests of their (most vocal and influential) members’ and in so doing provide ‘a basis for
the domination of [associated] institutions, organisations and other occupations’.
The ascendancy of fair valuation in financial reporting since 1990 has relied on relations
between the professional accounting bodies and the institutions inscribing and instating the
capital markets. IOSCO (2008a) sees the international accounting standards as a mechanism
which will facilitate capital by providing consistency to financial reporting. IOSCO’s
objective to reduce the ‘costs and complexity of international accounting standards’ has seen
‘adequate transparency’ equated to information on trading values[12]. Pronouncements
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issued by the Accounting Standards Board (2008), The Faculty and Institute of Actuaries
(2008), the European Financial Reporting Advisory Group (2008) and other quasi-regulators,
some of which exhibit cross-memberships, have lent support to IOSCO in its mission to
establish fair valuation as the single basis of financial reporting. Institutional momentum has
also been garnered in the joint FASB/IASB (2008) project[13] on fair valuation. The FASB
and IASB have sought ‘authoritative’ opinion from such as the Basel Committee on Banking
Supervision, the International Organisation of Pension Supervisors (formed by the OECD in
2004 and represented by supervisors of employer-sponsored pensions), and the Chartered
Financial Analysts Institute. The latter, as illustration of the type of consensus opinion
emitted, has issued statements that ‘fair value is the most relevant information for financial
decision making’ (Chartered Financial Analysts Institute, 2007) and has recommended fair
value assessment of defined pension plan assets according to ‘liquidity’ (of the sponsor).
The OECD (2007b) has suggested that the UK Accounting Standards Board has hoped to
boost its professional credibility by advocating an accepted actuarial funding method for
accounting valuation. British accounting standard setting bodies have long sought
involvement with the actuarial profession and the investments industry. Establishment of the
Pension Research Accountants Group and the Pension Management Institute in 1976 led to
several actuarial guidance notes for accountants. In 1988, a time in which the UK’s
Accounting Standards Committee was grappling for professional legitimacy (Willmott,
1986), the Committee issued a pension accounting standard, Statement of Standard Practice
24 Accounting for pension costs. An early stage of professionalisation is establishment of
legitimacy with other professions (McKinstry, 1997). SSAP 24 was introduced at a time
when pension fund policy in the UK had been controlled by professional advisers, and chief
among them the actuarial profession, for nearly forty years. Between 1970 and 1990, lack of
transparency was considered an important aspect of the prevailing approach to actuaries’
pension fund risk management, an aspect which was reflected in the requirements of SSAP
24 (Avrahampour, 2008).
The Accounting Standards Board, once established in 1990, moved to establish professional
accounting values such the public interest, value relevance, information transparency and
information reliability (see, Accounting Standards Board, 2000a). Although the UK
accounting profession—at the minimum, the accounting standard setting bodies—had by
1990 directed itself outside the actuarial profession, it maintained close connections with the
insurance and investments industries (see, Ernst & Young, 1996). The actuarial profession
was also developing at this time, when as described in Klumpes (1999, p. 186), actuaries
developed ‘realistic’ and ‘economic’ methods to report UK life insurance company
profitability to shareholders. The models incorporated risk into measurement by the rate used
in calculation of future expected outgoings and future expected premium income. (Actuaries
have legal authority to value the profitability of life insurance companies and pension
schemes in OECD countries.) Pension obligations and employees’ long service leave
entitlements had become objects of an ASB objective to position accountancy services as an
important profession in financial services. ASB issuance in 1999 of Exposure Draft FRED 20
Retirement Benefits associated these items with previous attempts at professional primacy
such as the fair value accounting treatment of long-term insurance contracts (Horton &
Macve, 1994). Fair valuation heralded in FRED 20 and subsequently mandated in FRS 17
Retirement Benefits (issued 2000) established the power of the Accounting Standards
Board[14]. For the first time, the requirements of a mandated accounting standard were more
stringent than actuarial practice. (FRS 17 has, for instance, mandated the Projected Unit
Credit method of expense calculation, one of several available methods.)
8
This achievement allowed the Accounting Standards Board to demonstrate its independence
from the actuarial profession. The British actuarial bodies responded to FRS 17 (rather than
caused a response, as had been the norm) by issuing a separate Guidance Note (see, Financial
Reporting Council, 2006a). In a battle for possession played out between the savoirs
(Dezalay, 1995), it is the accountants, once preceded, who were being heard first. The
Accounting Standards Board’s mooted changes to FRS 17 (see, Note 8) has kept the control
of pensions valuation firmly in accountants’ hands, with the period for submissions being
prolonged on more than one occasion. The accounting, investment analysis and actuarial
professions’ often shared consultation processes, shared supervisory authority, and
coincidence of pronouncements (e.g., International Forum of Actuarial Associations, 1997)
lend support to an argument that professional competition (Fogarty & Grant, 1995) has
shaped the accounting treatment for pensions.
5. REAL EFFECTS OF PENSIONS ACCOUNTING
This section present evidence to support argument that the attention and commitment paid by
accounting standard setting bodies to market value-based reporting has led to certain
deleterious changes to employer-sponsored retirement provision. Taking the form of a
scientific parallax, the model has shaped, rather than reflected, economic realities. A
following final section reflects on the implications for accounting’s public interest
obligations.
There have been four recent changes to private pensions plans in the US, UK and Australia.
Membership levels of schemes have declined. Sponsors have replaced DB arrangements with
accumulation schemes. Benefits available in accumulation arrangements have been less
generous than offered in DB schemes. Sponsors have transferred pension obligations from
their financial statements. These changes are considered below in four sub sections. The
material used focuses on the UK and the US.
5.1 CHANGES TO MEMBERSHIP LEVELS
The current plan for national social security in the UK is drastically modified from that drawn
up by William Beveridge in 1942. The UK supplements a basic state pension with mandatory
employee contributions made through a National Insurance system. There is no mandate for a
third tier of employer-sponsored pension arrangement. Coverage of employer-sponsored
plans in 2006 was 43 percent of men and 37 percent of women working (Office for National
Statistics, 2008). Membership levels in UK schemes have been in decline since the start of
the current decade. Between 2000 and 2005, membership of all types of UK pensions
schemes decreased by 33.1 percent. Between 2005 and 2007, the decrease was 18.4 percent,
and in open-ended (meaning contributions are accepted) schemes, 41.6 percent. Between
2005 and 2006, ‘active’ membership (not retired and contributing) of all types of private
sector schemes fell by 4.3 percent.
Declines in scheme membership levels are marked in DB arrangement. Between 2000 and
2005, the proportion of active members in DB schemes that were closed to new members
increased from around 10 percent to around 40 percent. Between 2005 and 2006, membership
of DB schemes (75 percent of active members in private sector schemes) fell by 13.0 percent
(The Pensions Regulator, 2007b). An extrapolation from a Pensions Regulator study of 1,300
private sector schemes and 200 public sector schemes suggests that between 2006 and 2007,
the total number of schemes fell 9.0 percent, the number of open-ended schemes dropped 8.8
9
percent, and membership of private sector accumulation schemes slipped 10.0 percent to
900,000. In 2007, 60 percent of DB schemes were closed to new members or were in the
process of closing down completely (Pensions Regulator, 2007a).
5.2 A SHIFT TO ACCUMULATION ARRANGEMENT
Accounting requirements have been acknowledged by standards setters themselves and
commentators as contributing to valuation uncertainty and problems of funding shortfalls in
employer-sponsored pensions, particularly in regards to cost (Accounting Standards Board,
2008; Clark & Monk, 2007b). DB schemes tend to be more generous and encourage greater
employee contributions accumulation schemes. In the UK, the average private sector
employer (employee) contribution rates in 2005 were 16.0 percent (4.4 percent) of salary for
DB schemes compared with 6.3 percent (2.7 percent) for accumulation schemes (Office for
National Statistics, 2007). Most British DB schemes existing in 2004 were created before
1980 (between 59 and 71 percent) (Office for National Statistics, 2005). One in three open
DB schemes existing in 2006 was set up in the period 1945-1969. This compares to five
percent of open accumulation schemes set up in the same period. The relative proportions
reverse with schemes set up after 2000 (Office for National Statistics, 2007). (Approximate
figures have been used in these comparisons.) Figure 2 below gives the movements between
UK DB and accumulation schemes in the period 2000-2007.
[insert point for Figure 2]
Between 2000 and 2004, the numbers of open DB schemes decreased by 36.3 percent (52.1
percent decrease in the private sector), while the number of accumulation schemes increased
13.2 percent (Government Actuary’s Department, 2006). The smaller decrease in 2005 of all
open DB schemes includes a 66.2 percent decrease in private sector open DB schemes. The
fewer accumulation schemes in 2005 (7.8 percent decrease) has been attributed to the closure
in that year of schemes with fewer than 12 members. There have been two types of DB
dismantlement. The first type concerns the dissolution and freeze of DB schemes. (A pension
freeze means stopping future accruals for existing members and/or new employees.) A
second type of dismantlement concerns the decision of a plan sponsor to offer its pension
obligations for sale to uninterested buyers (in the sense of non-fiduciary interest). Munnell et
al. (2006) list 17 US-listed companies which, not exhibiting signs of financial distress, closed
their DB pension schemes over the period 2004-2006. The 400,000 affected employees were
all offered substitute 401(k) plans. Replacement of DB schemes in the US by accumulation
schemes and elimination of benefits in existing arrangements have been attributed to inter
alia fair value accounting (Barlev & Haddad, 2003)[15]. Similar causes to declining numbers
of DB schemes in the UK have been cited (Bridgen & Meyer, 2005).
The following six large, politically visible companies in the US and Europe closed their DB
schemes during the period 2005-2007. The sample was chosen judgementally on the basis of
the financial health of each of the companies in the sample at the time of scheme closure.
Sprint Nextel Corporation (nyse: s) announced in 2005 that from 2006 employees vested in
its DB plans prior to its 2005 purchase of Nextel Communications Inc. would stop accruing
benefits. Non-vested employees would receive benefits once satisfying qualification
requirements. The plan would affect 39,000 of the pre-acquisition total of 82,900 employees.
The announcements appeared to be related to plan solvency[16]. ALCOA (nyse: AA)
announced, in 2006, plans for closure of its DB scheme for new employees from 2007.
10
Quoting ‘volatility’ and ‘expense’ (possibly code for the accounting requirements to use
selling prices in calculation of DB plan expenses) ALCOA made a decision to supply new
employees an accumulation 401(k) pension plan, offering a lower absolute level of employee
benefits[17]. Similar plans were announced in 2006 by DuPont (nyse: DD), announcing that,
beginning 2008, contribution rates to existing US workers’ pensions (estimated at 30,000,
August 2006) would be reduced by two-thirds, disqualifying portions of salaries from
attracting pension entitlements, closing all DB schemes to employees hired after December
2006, and removing co-contributions for health care and life assurance benefits. The plans
were prompted by the solvency position of its DB schemes. At year end 2005, DuPont DB
pension obligations were USD22.9 billion and associated assets were USD19.8 billion. The
announced closure and contribution reduction were expected to improve earnings by
approximately 3 cents per share in 2007 and 5 cents per share in 2008[18].
The consumer goods company Unilever NV (nyse: UN) announced plans in 2007 to close its
DB scheme to new members, offering in its place a less generous ‘hybrid’ scheme[19]. The
new scheme had a DB component, based on a career average, covering pensionable earnings
up to a threshold of GBP35,000 per annum. Above this threshold there was an accumulation
component. Employee members of the existing Unilever DB scheme were asked to increase
their contribution to the fund. The Spanish-owned Ferrovial subsidiary British Airports
Authority (London: BAAPY) announced in 2008 that it was closing its solvent staff DB
scheme to be replaced by accumulation arrangement. Members of the replacement
accumulation scheme were offered an employer contribution rate of fifteen percent, ill-health
retirement and death-in-service benefits, and life assurance benefits for members’ partners.
Actuarial advice obtained by BAA’s staff association suggested that the benefits promised
under the accumulation scheme would not approximate the benefits foregone under the DB
scheme[20]. British Airways (London: BAY) announced in 2006 that it wanted to
significantly reduce its GBP2.1 billion pension fund deficit. The success of the deal depended
on whether British Airways staff accepted a cut in future benefits and/or an increase in the
scheme’s normal retirement age for pilots and cabin crew from 55 to 65 and from 60 to 65 for
ground staff. Trustees’ subsequent acceptance of the offer was met with a rejection from
employees.[21]
5.3 CHANGES TO BENEFIT LEVELS
A third phenomenon is the reduction of benefits available in existing arrangements. Employer
contribution rates in UK accumulation schemes between 2006 and 2007 were significantly
lower (respectively, 56.5 percent and 64.2 percent) than in comparable DB schemes (Office
for National Statistics , 2008). This suggests that cost considerations might be significant to
sponsors. The average pension obligation reported on the FTSE Global 100 index as at 31
December, 2007 was GBP5.9 billion. The average excess of obligation over plan assets was
GBP176.5 million (3.0 percent). The significance of these amounts can be assessed by noting
that pension obligations represented 13 percent of the GBP4.58 trillion market capitalisation
of the FTSE Global 100 index as at 31 December, 2007. The reported total pensions deficit in
2007 was 92.0 percent of the GBP19.1 billion of pension contributions (Lane, Clark &
Peacock, 2008). The sensitivity of these amounts to changes in assumptions used in their
calculations have been illustrated by Brigden et al. (2008), predicting, for example,
significant increases to contributions payable to plans if the discount factor used were to be
lowered from the rates required over the 2004-2007 period.
11
The UK Accounting Standards Board proposals to lower the discount factor used (see, Note
8) are supported by the UK Pensions Regulator, which has added a proposal to ‘standardise’
the various longevity assumptions (mortality rates) permitted in pensions accounting.
According to commentators, if both set of proposals were implemented in the form proposed,
they would increase the volatilities and absolute levels of reported pension liabilities. The
Department for Work and Pensions has advised its critics (e.g., Bridgen et al., 2008; National
Association of Pension Funds, 2008) to ‘put up or shut up’ (Thornton, 2007, p. 40).[22]
Example of the types of benefits affected is provided by the British retailer Marks and
Spencer Group plc (London: MKS). In January 2009, the retailer announced various
reductions of benefits in its DB staff pension schemes, affecting at the time 21,000 members.
Reductions included a ten percent reduction of its annual GBP300 million cash contributions
to plans; partial disqualification of increases to salaries to pensionable salaries; acceleration
of reductions of benefits for members retiring before pensionable age; and redirection of
income earned by assets of the schemes to the company. Reasons cited for the announced
measures included the company’s intention to reduce its reported pension liabilities, and
uncertainties introduced by reporting requirements placed on private DB schemes.[23]
5.4 TRANSFER OF OBLIGATIONS
A fourth phenomenon is the transfer of pension liabilities from sponsors’ financial
statements. Tinker and Ghicas (1993) have suggested that compliance with SFAS 36 (since
superseded by SFAS 87) may have led to overstatements of US pension surpluses due to
underreporting of net pension liabilities. The requirement of SFAS 36, by underscoring ‘the
amount that could be appropriated’ (Tinker & Ghicas, 1993, p. 361), possibly motivated
takeovers of firms tin order o extract the plan surpluses and divert them from plan members.
The attractiveness of a sale option for a plan sponsor comes with the financially
uncompensated risk of holding a pension obligation in its statement of financial position. The
aggregate position of DB schemes may vary considerably. In 2006, the value of aggregate
deficits for UK DB schemes was estimated at GBP33.8 billion if calculated according to
Section 179 of the Pensions Act 2004 and GBP88.6 billion under FRS 17 (The Pensions
Regulator, 2007a). The reason for the difference, according to The Pension Regulator, is that
under the Pensions Act, estimates of liabilities exclude any indexation of benefits accrued
before April 1997, whereas FRS 17 includes indexation for the entire accrual period. It
becomes in the interests of an investor to negotiate a transfer price at fair value such that
benefits under a plan are reduced and a surplus extracted.
Buyers of pension plans in the UK have included private equity consortia and investment
banks [24, 25]. In retirement plans established under trust, the employer does not have direct
liability for benefits but only an obligation to fund the trust to provide the benefits. In a sale
agreement, plan members stand to lose if the sale agreement includes a shortfall clause
whereby the seller underwrites any shortfall in the actual amount transferred by the trustees
compared with the negotiated transfer amount. Other usual consequence affecting the
beneficiaries of a transferred plan is a non-extensible cap to any annuities purchased under
the plan. Both have been common in, following the issues of FRS 17 and IAS 19, the
transfers of pension obligations made as part of an acquisition of a business and outright sales
of pension obligations (Clark and Monk, 2007a).
12
6. ACCOUNTING-IN-PRAXIS
Our aim has been to conceive the gaps and tensions between the social idea of the private
pension scheme and the public interest obligation of the accounting profession as recognised
in accounting pronouncement. The financial panics which preceded conceptualisation of
retirement savings and health insurance schemes in the early twentieth century (Bridgen,
2000) were the rationale for the promotion of the actuarial and accounting professions
(Willmott, 1986). Actuaries were seen to provide accuracy to a scheme’s funding
requirements by appropriate measurement of payment obligations and assets used to fund
those obligations (Keintz & Stickney, 1980), while accountants were seen to provide an
objectively relevant level of transparency (McKernan, 2007). By providing adequate
information about the firm, the capital markets would self-correct, financial crises could be
avoided and distribution of wealth could proceed. Hence, transparency became representative
of relevance, which became the value most intimately caught up in the ideal of the public
interest. To date, recognition of the public interest in the accounting treatment of private
pension schemes has been justified by reference to transparency, comparability, and
relevance to capital markets and, more tenuously, to labour markets.
We are reminded by Bourdieu (2001, p. 97) that organizations and individuals in
organizations engage in economic exchanges to accrue various forms of capital: economic,
cultural, and social. Cultural capital has been defined as ‘those expectations for action within
a collectivity that affect the economic goals and goal-seeking behavior of its members, even
if those expectations are not oriented toward the economic sphere’ (Portes & Sensenbrenner,
2001, p. 114). Contemporary meanings of social capital refer metaphorically to the building
of a community through its spirit and its joint activities (Farr, 2004) and to the
systematization of the effects of social relations (Bourdieu, 2001). ‘The very meaning of the
exchange’ (Bourdieu, 2001, p. 106) between a plan’s sponsor, trustee and members is the
stocks of connections and social relationships and the discharge of obligations of that
involvement.
The employer-sponsored pension plan is an arrangement designed to improve the quality of
both work and social life (Gallie, 2006) in capitalist societies. The rise of pension schemes as
the principal vehicle of institutional investment and (what might be seen as) the predominant
form of appropriation of surplus-value has made labour a direct participant in the wild
speculations of financial capital. A perspective of a form of social organization as an
unsecured debt has inserted a concrete antagonism between lived experience, which refers to
the store of meanings projected into members’ accumulated savings, and representation of
that arrangement. A permanent gap is opened between ‘the phenomenal experience of reality’
and its scientific, as-if objective explanation (Žižek, 2006, p. 247). This is example of Žižek’s
description of how representation on occasion instates for reality. Reporting transparency and
comparability are ‘not directly properties which demonstrate ... priority over others, but
indicators of such properties—the so-called “fitness indicators”’ (Žižek, 2006, p. 247,
emphasis original). Setting such as representational faithfulness into a hierarchy governed by
a public interest ideal is illusory.
Of course, the enigma here is: how does this short circuit come about? How can the ...
experience which was originally a mere by-product of goal-oriented activity ... turn into
an aim in itself? (Žižek, 2006, p. 247, emphasis original)
13
It is not as if accounting standard setting bodies are unaware that their commitment to an
ontology borne of financial economics might frustrate a public interest ideal. This might be
confined to a professional (philosophical ) difficulty and a matter for reflection if not for the
reliance of many OECD countries on private solutions as a mechanism of social security and,
therein, opportunity for the standard setting bodies to make a (real) contribution to the public
interest. Private pension schemes provide an example of where standard setters’ partiality to
mirror economic reality reflects another partiality towards a particular, imagined conflux of
social welfare and private interests. Fair valuation has been used to promote an active capital
market and, to that extent, some success can be marked out. Unintended outcomes include an
unsecured, volatile debt of the plan sponsor, in turn placing pressure on public funds for
provision of retirement security. The truth of capital markets (symbolizing economic reality)
has vacated other meaning from national social policies and cultural meanings of postretirement arrangement.
Representation of the private pension by its trading value is at the abolitionist end (Hall,
1993) of public interest models. Accounting hardly has discretion to lay aside its normative
public interest ideal. Recovery of accounting’s status as a helping profession (Danile &
McCarthy, 2007) is linked to an ability to countenance the short-circuiting logic of
appearance and essence (Žižek, 2006, p. 417). For a consulting actuary, proportionality
means to ‘consider not only the potential cost from the perspective of those who incur the
cost, but also the potential benefits when viewed from the perspective of the beneficiaries’
(Board for Actuarial Standards, 2008). Less even-handed is accounting’s prescription of a
valuation base designed for a sceptical but otherwise uninterested investor. Reality and a
promise of a better one are given together in a rationalized world (Eagleton, 1991, p. 184). A
preparedness to maintain (by practising, commenting on and teaching) accounting’s
conceptual framework and a set of financial reporting standards tailored to a set of private
interests must recognise the performative contradiction. The public interest is not some sort
of screen interposing between social realities and ourselves; nor is it a superstructure erected
over pressing economic realities. If the profession is to discharge its public interest
obligation, it must show its link to the technical principles it prescribes. Accounting’s
governing principle comes into being as a politics of prescription (described in Žižek, 2006,
pp. 321-325). Its limitation is precisely that the form of the public interest as ideal is not
concrete enough, but a mere neutral container of some content—fair value, truth and fairness,
and representational faithfulness—that eludes this form.
[1] US, UK, Australia, Canada, Ireland, New Zealand, Belgium, Czech Republic, France,
Germany and Japan. Assets in OECD private pension schemes at 2006 were valued at
USD15.2 trillion, just under two-thirds of the total OECD funded pensions market.
<http://webnet.oecd.org/wbos/index.aspx> Downloaded 7 July 2008. The terminology in this
paper follows the OECD (2007a) pensions taxonomy.
[2] The US, UK and Australia have relatively high ratios of pension fund assets-to-GDP
(over 70 percent) and have not regulated funding requirements of private pension plans as
14
they have been in places such as the Netherlands, which places solvency buffers on pension
funds’ equity and derivatives investment strategies and mandates the debt securities yield
curve used to value pension obligations.
[3] The Committees of European Securities Regulators, European Banking Supervisors and
European Insurance and Occupational Pensions Supervisors have begun acting in a
regulatory capacity.
[4] Sixteen reporting standards and pronouncements prescribe pensions reporting in the US,
UK and Australia. Fair valuation for benefits payable was introduced in 1985 by SFAS 87
Employers’ Accounting for Pensions; current US standards are SFAS 157 Fair Value
Measurements and SFAS 158 Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans. The UK and Australia have issued, respectively, FRS 17 Retirement
Benefits and AASB 119 Employee Benefits. The IASB has issued IAS 19 Employee Benefits
and IAS 26 Accounting and Reporting by Retirement Benefit Plans. The Australian
accounting standard AAS 25 Financial Reporting by Superannuation Plans, issued to apply
to public sector agency reporting, provides an exception to use of fair valuation as a
measurement basis for payment obligations.
[5] Two FASB standards discuss fair value in relation to markets. SFAS 115, cl. 3a, justifies
the use of fair value of equity securities only in cases where prices are readily available,
giving a definition of fair value as a potential seller’s estimates of market prices based on the
present value of estimated future cash flows. SFAS 125 supplies procedures for determining
the fair value of assets in circumstances where quoted market prices are not available. The
US has moved toward IAS 19, which in 2005 was amended to resemble the UK’s FRS 17
(Munnell et al., 2006).
[6] Accounting for expenses in accumulation plans as set out in IAS 19, FRS 17, SFAS 158,
and AASB 119 is straightforward because the entity’s expense for each period is determined
by the undiscounted amounts to be contributed for that period as set out in agreement
establishing the plan. Treatment of expenses in DB arrangement is more extensive. An initial
increment produced using the Projected Unit Credit Method represents the undiscounted
current obligation. The associated expense, known as the current service cost, is calculated by
reference to the discounted value of the additional unit of benefit attributable to the current
period of service of employees in the plan. To this amount is added any change in the fair
values of pension assets and in the discounted value of accrued benefits, the latter known as
interest cost, with an adjustment made for the expected return on plan assets, which is
computed by multiplying the assumed long-term rate of investment return by the average fair
value of assets during the year and, if positive, deducted from the other items. Additionally,
changes to the levels of benefits promised to plan members, known as past service cost, are
amortised to the statement of financial performance over the period from reporting date to
expected redemption date. The effects of fluctuations in market values of plan assets, known
as actuarial gains and losses, are not recognised in the statement of financial performance but
15
in a separate statement of total recognised gains and losses. Unrecognised actuarial gains and
losses (within a prescribed bound) and unrecognised past service cost are recognised
indirectly by adjustments made to the defined benefit obligation.
[7] The UK, US and Australia are expected to act on IASB Interpretation IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction
(issued July 2007). IFRIC 14 establishes the salience of fair-valued assets for those DB
pension scheme arrangements that require a minimum funding level from a sponsor (most of
them). The condition set is this: when fair-valued plan assets exceed present-valued
obligations, a surplus is created. In the usual case, such would be recognised as an asset. If a
minimum funding requirement exists—customary in a DB scheme—an asset is not to be
recognised, a liability is to be recognised by reducing any recognised DB asset (in the case of
a surplus) or by increasing the DB liability, and note disclosure is required on the ’estimation
uncertainty’.
[8] The Accounting Standards Board (2008) has advocated several changes to FRS 17,
including an extension of fair valuation measurement from final salary schemes to average
salary and cash balance pension schemes; reporting of changes in pension assets and
liabilities as they ‘happen’ rather than as projected; use of actual current requirement of
estimated returns on assets in the calculation of the pension obligation; and replacement of
the corporate bond rates currently used as to value pension obligations by a lower rate
attaching to public bonds.
[9] Four inconsistencies in pensions reporting requirement can be noted: (i) Allowance in
IAS 19 of offset of the value of plan assets against payment obligations is inconsistent with a
principle set out in IAS 1 Presentation of Financial Statements, cl. 32 and present in other
treatment, e.g., IAS 18 Revenue and IAS 12 Income Taxes; (ii) Recognition of expected return
from plan assets departs from the concept of accrual accounting—to recognise income when
it is earned—as set out in the IASB Conceptual Framework document; (iii) The extent of
discretion permitted for recognition of actuarial gains and losses contradicts requirement in
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors: (iv) Pension
reporting standards use principles of measurement faithfulness, matching expenses to income
and assets to liabilities, and the reliability of using the historical dates of economic events.
Justification for these principles could once be found in a doctrine of historical cost; resort to
them in a fair valuation regime is more tenuous. Use of the matching principle in pensions
reporting is selective, as requirement to value payment obligations independently of assets
purchased in their satisfaction makes plain.
[10] Considerable latitude exists between current service costs and accounting expenses. The
discrepancy between the accounting expenses of and cash contributions made to DB plans
attached to FTSE Global 100 companies in 2007 was GBP4.47 billion (Lane, Clark &
Peacock, 2008). The yields offered by iBoxx (http://www.markit.com) cash corporate bonds
in January 2009 were in the range of 6.5 percent to 13.3 percent.
16
[11] The Public Interest Oversight Board supports the work of the IASB through issuance of
Statements of Membership Obligations.
[12] IOSCO has factored in international accounting development since 1988, when
statements of support were issued for IASC principles and the implementation of
international accounting standards. Current levels of support are suggested by the entitling of
‘A.1. Enforcement of Accounting Standards’ in IOSCO’s 2008 work program, which gives
that IOSCO ‘closely monitors the developments’ in IFRSs by provision of comments on
proposed changes and ‘routine discussion’ of standard-setting work with representatives of
the IASB (IOSCO, 2008b).
[13] The Norwalk Agreement has established a formal working relationship between the
FASB and the IASB. It has been suggested that the FASB is in a privileged position in terms
of its influence on the IASB (De Lange & Howieson, 2006).
[14] FRS 17 requirement reflects the original form of the FRED 20 proposal that the effects
of fluctuations in market values of plan assets be excluded from operating results of the plansponsoring entity and be treated in the same way as revaluations of fixed assets, i.e.,
recognised in an ‘auxiliary’ performance statement, the statement of total recognised gains
and losses.
[15] Munnell et al. (2006) attribute the attractiveness of DC schemes in US companies to
sponsors’ intentions to reduce overall cash outlays, as DC schemes typically require lower
employer contribution levels relative to DB schemes; pressures of rising health care insurance
outlays, as health care is commonly ‘bundled’ with retirement benefits in the US; possibility
that schemes are considered as an unwanted cost impost to senior management; actuarial
risks, and the attractiveness of income gains that can be recognised when an organization
closes a scheme.
[16] Eckert, B. Sprint Nextel freezes pension for half its workforce. Washington Business
Journal
(23
January
2006).
<http://www.bizjournals.com/washington/stories/2006/01/23daily6.html> Downloaded 11
January 2008.
[17] Maher, K., & Glader, P. (17 January 2006). ALCOA’s pension will be closed to new
workers.
Wall
Street
Journal.
<http://www.online.wsj.com/article/sb113745049216447873.html?mod=us_business_whats_
news> Downloaded 11 January 2008.
[18] Steve, J. (28 August 2006). DuPont cuts defined pension contributions. Reuters.
<http://www.uwua1-2.org/09_08_record.pdf> Downloaded 11 January 2009.
17
[19] BBC News (1 March 2007). Unilever to shut pension
<http://news.bbc.co.uk/2/hi/business/6408297.htm> Downloaded 18 July 2008.
scheme.
[20]
Stewart,
N.
(2008).
London:
Investments
&
Pensions
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<http://www.ipe.com/news/baa_staff_accept_final_salary_closure_28475.php> Downloaded
20 July 2008.
[21] Frei, E. (2007). Brite Media. <http://www.financemarkets.co.uk/2007/02/13/disputeover-british-airways-pension-plan> Downloaded 20 July 2008.
[22] Actuarial estimates have suggested that five-year differences in the life expectancies of
working and non-working people in OECD countries would be sufficient to add ten percent
to the total value of pension obligations. To give some context, estimated pension obligations
on FTSE 100 companies were €250 billion in December 2008 (Lane, Clark & Peacock,
2008). Consulting actuaries use mortality tables as issued by national public actuaries.
[23]
Press
Release:
Marks
and
Spencer
Group
<http://corporate.marksandspencer.com/documents/results_presentations/2009/q3_ts>
Downloaded 7 January 2009.
plc
[24]
Investments
&
Pensions
Europe.
<http://www.ipe.com/news/db_schemes_continue_feeding_buyout_market_28582.php>
Downloaded 17 July 2008. Examples of transfers of pension obligations in the US and the
UK collected by the author have not been presented.
[25] A UK commercial consultancy has reported the intentions of sponsors of some British
DB schemes in 2008 to offer their pension obligations for sale. CREATE-research, London.
Downloaded <http://www.create-research.co.uk/pdfs/dbanddcplans2008.pdf> 26 November
2008.
18
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Figure 1: Regulatory and Supervisory Arrangement in the UK, US and Australia
Regulator/Supervisor
International OECD-issued standards on
governance of private
pensions
Accountants
Standards issued by IASB
UK
Standards issued by
Financial Reporting
Council, which supervises
ICAEW and other
member bodies
US
Australia
Actuaries
International Forum of
Actuarial Associations
provides input to the IASB
work program
The Pensions Regulator
Faculty and Institute of
administers Pensions Act
Actuaries supervised by
2004, Pension Schemes Act
Financial Reporting
1993 and Social Security Act
Council
1986 under supervisory aegis Standards issued by
of the Financial Services
Board for Actuarial
Authority
Standards
The Dept of Labor administers American Academy of
the Employee Retirement
Actuaries is supervised by
Income Security Act 1974 and the Dept of Labor
the Pension Protection Act
Standards issued by
2006
Actuarial Standards Board
Internal Revenue Service and
Securities & Exchange
Commission have regulatory
and supervisory authority
Australian Prudential
Standards issued by
Regulation Authority
Institute of Actuaries of
supervises Superannuation
Australia
Industry (Supervision) Act
No oversight body
1993 and has required
trustee certification
Australian Securities &
Investments Commission
administers Corporations Law
governing financial reporting
Reserve Bank of Australia has
supervisory authority
Coordination provided by the
Council of Financial
Regulators
Financial Accounting
Foundation supervises
the AICPA
Standards issued by
Financial Accounting
Standards Board
Financial Reporting
Council supervises
Institute of Chartered
Accountants in Australia,
Certified Practising
Accountants Australia
and other member
bodies
Standards issued by
Australian Accounting
Standards Board
Figure 2: UK Occupational Pension Schemes by Type and Status
Defined Benefit
Status
2000 2004 2005
Open
17.9
6.3
6.2
Closed
11.2
8.7
4.5
Frozen^^
5.6
3.2
1.3
Total
34.7 18.1 12.0
Accumulation*
2000
43.7
17.7
1.2
62.6
2004 2005
46.8 44.7
10.7
8.3
13.4
.5
70.9 53.5
Total^
2000 2004 2005 2007
62.1 54.0 50.9 29.6
29.0 19.5 12.8 18.9
6.8 16.6
1.8
4.3
97.9 90.1 65.5 53.0
Data source: Office for National Statistics, 2005, 2007, 2008. Figures shown are in
thousands. * Accumulation schemes are known as defined contribution and DC schemes in
the US and Australia and as money-purchase schemes in the UK. ^=Excludes some schemes
offering DB and DC arrangement. ^^=Excludes schemes that were winding up.