Risk sharing in Swiss pension plans in a nutshell
Due to its specific characteristics, the discussion on accounting for Swiss pension plans (BVG plans) under IAS 19 is as old as the standard itself. While from the perspective of national accounting standards (Code of Obligations / Swiss GAAP FER) a (short-term) shortfall in a pension plan does not automatically result in the recognition of a liability, which is the case under IAS 19. In addition, the dynamics of the calculation method generally causes the pension obligation to tend toward higher values.
- The characteristics of Swiss pension plans
- And what about risk sharing?
- What impact will this have?
The characteristics of Swiss pension plans
In the event of an underfunding (the pension obligation exceeds the plan assets), the law obliges the pension trustees to take the precautionary measures to remedy it within a reasonable period. In addition to benefit reductions (reduction of the conversion rate, increase in the retirement age, reduction of the interest on retirement assets), restructuring contributions can also be imposed on employees and employers. In this case the law stipulates that the employer’s contribution must be at least equal to the employee’s contributions. This also means that employers cannot be required to provide financing for more than half of a shortfall. According to the current accounting treatment for Swiss pension plans under IAS 19, it was assumed that the costs incurred to cover the pension obligations in the event of a shortfall are borne solely by the employer.
And what about risk sharing?
Fuelled by the current environment steadily increasing life expectancy and low interest rates, many retirement plans have taken measures to secure the financing of the pension benefits. Benefit reductions were also imposed on employees. The Commission for True and Fair View Accounting of EXPERTsuisse has now come to the conclusion that, under certain conditions, necessary measures for the reduction of pension benefits are to be taken into account in the assessment of the pension obligation pursuant to IAS 19 (see position paper “Risk Sharing” Characteristics of Swiss pension plans in the context of IAS 19 accounting of 20 December 2016). As a result, the risk sharing characteristics of Swiss pension plans are also included in the balance sheet under IAS 19.
What impact will this have?
Taking into account future measures for reducing pension benefits results in a lower value of the pension obligation and thus, in a significant reduction in the level of debt and in an increase of the equity ratio. The position paper does not deal with the concrete methodology for quantifying the risk sharing characteristics. There is a further need for discussion between preparers of financial statements and pension and accounting experts. In any case, the assessment to be made is complex and subject to considerable judgement, with appropriate disclosure in the Notes. According to the Commission, the reassessment of the burden-sharing between employer and employee constitutes a change of estimate (i.e. adjustment of actuarial assumptions), which is to be recognised in other comprehensive income at the time of the adjustment. Consequently the frequently significant and unexpected earnings are likely to be significantly lower in case of a conversion rate reduction, which according to the previous accounting method has to be recognised as a past service cost in profit or loss. Since these “profits” are often a source of irritation and need to be explained to the stakeholders, this would also be a step forward with regard to the relevance of IFRS financial statements in Switzerland.
Reflections on the first year of implementation