Pension Benefits that Depend on Asset Returns

This is a narrow-scope research project designed to address only some types of pension benefits paid that depend, wholly or partly, on the return on a specified pool of assets. Applying IAS 19 Employee Benefits, a company:

• uses assumptions about future returns on the specified assets in estimating the amount of the benefits to be paid to employees; and
• applies a discount rate in determining the ‘present value’ of the estimated benefits—their value today.

The discount rate is generally based on interest rates for high-quality corporate bonds. The assumed future returns used to estimate the amount of benefits to be paid reflect variability inherent in those returns. Consequently, the assumed returns are often higher than the interest rate used to discount the benefits to their present value. This leads to an inconsistency within the measurement of the company’s liability to pay those benefits.

As a result, the present value calculated in this way could overstate the liability and thus could produce information that is not relevant to investors.

The project’s objective is to assess whether it would be feasible to eliminate this measurement inconsistency by capping asset returns used in estimates of pension benefits that depend on asset returns, without changing other aspects of IAS 19. The asset returns used in those estimates would not exceed the discount rate used to determine the present value of those benefits.

If the research establishes that this approach would not be feasible, the staff expects to recommend no work on pensions.