Big Cost Increases For Pension Plans
Are you prepared?
Companies which apply market based accounting methods for pension and related liabilities may face a significant increase in pension costs in 1999 as a result of the significant fall in bond yields over 1998. This is likely to affect all companies which adopt the new international accounting standard IAS19, or apply the US accounting standard FAS87.
The following table shows the reduction in the benchmark government bond yield from 1 January 1998 to 28 October 1998.
| Country |
Reduction in Benchmark yield
from 1 January 1998 to 28 October 1998 |
| Germany |
1.1% |
| UK |
1.1% |
| US |
1.2% |
| Netherlands |
1.0% |
| Italy |
1.0% |
As you can see there has been a fall of more than 1% over the period in benchmark government bond yields. While there is some evidence that the spread between corporate bond yields which are used as a benchmark for FAS 87 and IAS 19 has increased, the drop in bond yields will still mandate a significant reduction in the discount rate that can be used in calculating pension expense for 1999, assuming that bond yields do not rise significantly before the end of this month.
For a typical final salary plan a 1% fall in the discount rate to be used could increase the cost for 1999 over that applied in 1998 by as much as 40%. Clearly this is a significant issue and companies should be budgeting for any increase in accounting costs over the coming year.
The actual cost increase for a pension plan will depend on a number of other factors, the most significant of which will be the performance of the plan assets over the year. A plan which has invested in matching bonds may have offset some of the impact of the falling discount rates with enhanced investment returns over 1998. However, the expected future return on plan assets may, in such cases, need to be reduced.
Clearly some thought will be needed in setting the appropriate assumptions for 1998. If you would like advice on this issue please contact your normal Watson Wyatt consultant or David Collinson at the Reigate office (or by e-mail at david.collinson@eu.watsonwyatt.com).
|
Contact Us 