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6 Current value measures of liabilities

No documento THE FINANCIAL REPORTING OF PENSIONS (páginas 117-129)

5.17ȱ Theȱsecondȱpossibilityȱisȱthatȱtheȱliabilityȱisȱmeasuredȱbasedȱonȱaȱbestȱestimateȱorȱexpectedȱvalue,ȱ reflectingȱtheȱprobabilityȱofȱtheȱdifferentȱoutcomes.ȱȱSomeȱwouldȱconsiderȱtheȱfirstȱpossibilityȱtoȱbeȱ counterȬintuitiveȱandȱatȱoddsȱwithȱrepresentationȱofȱtheȱeconomicȱreality.ȱȱIfȱitȱisȱtheȱnatureȱofȱtheȱcurrentȱ termsȱandȱconditionsȱ(providedȱbyȱcontractȱand/orȱlaw)ȱthatȱemployeesȱhaveȱvariousȱsettlementȱoptions,ȱ someȱbelieveȱthatȱreflectingȱassumptionsȱaboutȱtheȱprobableȱoutcomeȱisȱpartȱandȱparcelȱofȱtheȱ

assumptionsȱusedȱinȱestimatingȱtheȱfutureȱcashȱoutflowsȱandȱdoesȱnotȱinvalidateȱtheȱprincipleȱsetȱoutȱinȱ paragraphȱ5.14ȱthatȱtheȱmeansȱofȱsettlementȱisȱcurrentlyȱavailableȱtoȱtheȱemployer.ȱȱInȱthisȱcaseȱtheȱmeansȱ ofȱsettlementȱthatȱisȱcurrentlyȱavailableȱisȱtoȱsettleȱtheȱliabilityȱaccordingȱtoȱhowȱemployeesȱchooseȱtoȱ receiveȱtheirȱpromisedȱbenefits.ȱȱȱȱ

ȱ

byȱtransferringȱaȱspecifiedȱbundleȱofȱassets.ȱȱAnȱappropriateȱmeasurementȱobjectiveȱshouldȱleadȱtoȱtheȱ mostȱusefulȱmeasureȱinȱtheseȱandȱotherȱcircumstancesȱinȱwhichȱdiscountingȱfutureȱcashȱoutflowsȱmayȱnotȱ beȱtheȱrightȱtechnique.ȱ

6.6ȱ ItȱwasȱnotedȱinȱSectionȱ5ȱthatȱtheȱmainȱcandidatesȱforȱsettlementȱthatȱareȱlikelyȱtoȱbeȱcurrentlyȱ availableȱareȱ(a)ȱrunningȱoffȱtheȱliabilityȱandȱ(b)ȱbuyingȱoutȱtheȱbenefitsȱwithȱaȱsuitableȱinsuranceȱentity.ȱȱ Beforeȱdiscussingȱthoseȱfurther,ȱweȱshouldȱdiscussȱaȱthirdȱalternative,ȱmeasuresȱthatȱareȱderivedȱfromȱ regulatoryȱrequirementsȱwhenȱentitiesȱareȱsubjectȱtoȱpensionȱregulation,ȱbecauseȱregulatoryȱmeasuresȱ oftenȱformȱtheȱbasisȱofȱemployers’ȱobligationsȱtoȱpayȱcash,ȱandȱcouldȱbeȱviewedȱasȱanotherȱsettlementȱ amount.ȱȱȱ

Regulatoryȱmeasuresȱofȱliabilitiesȱ

Backgroundȱ

6.7ȱ Inȱmanyȱarrangementsȱforȱtheȱprovisionȱofȱpensionȱbenefits,ȱassetsȱareȱsetȱasideȱ(oftenȱinȱlegallyȱ separateȱentities)ȱtoȱprovideȱsecurityȱforȱpromisedȱbenefitsȱandȱfundsȱforȱtheirȱpayment.ȱȱOneȱareaȱ particularlyȱaddressedȱbyȱpensionȱregulationȱisȱfundingȱrequirementsȱofȱdefinedȱbenefitȱplans8.ȱȱFundingȱ regulationȱisȱlikelyȱtoȱfocusȱonȱensuringȱthatȱfundingȱofȱpensionȱplansȱisȱadequateȱandȱtherebyȱ

minimisingȱtheȱriskȱofȱpensionȱplansȱnotȱhavingȱsufficientȱfundsȱtoȱfulfilȱtheirȱpensionȱpromises.ȱȱ Thereforeȱregulationȱwillȱseekȱtoȱprovideȱaȱframeworkȱwithinȱwhichȱplansȱareȱfundedȱtoȱaȱlevelȱtoȱ provideȱsomeȱsecurityȱthatȱtheȱliabilitiesȱwillȱbeȱmetȱasȱtheyȱfallȱdue.ȱ

6.8ȱ Regulatorsȱareȱfacedȱwithȱtheȱchallengeȱofȱsettingȱaȱregulatoryȱregimeȱthatȱmonitorsȱfundingȱatȱanȱ adequateȱlevelȱsuchȱthatȱtheȱriskȱofȱaȱpensionȱplanȱbeingȱunableȱtoȱpayȱpensionȱliabilitiesȱisȱreducedȱtoȱanȱ acceptableȱlevel.ȱȱInȱtheȱEU,ȱforȱexample,ȱlegislationȱhasȱbeenȱenactedȱthatȱrequiresȱpensionȱplansȱtoȱholdȱ assetsȱtoȱcoverȱtheirȱ‘technicalȱprovisions’9.ȱȱȱ

TechnicalȱprovisionsȱinȱtheȱEUȱ

6.9ȱ Technicalȱprovisionsȱareȱtheȱamountsȱrequired,ȱbasedȱonȱactuarialȱcalculation,ȱtoȱmakeȱprovisionsȱ forȱtheȱplan’sȱliabilities.ȱȱAȱtechnicalȱprovisionȱhasȱbeenȱdescribedȱbyȱaȱregulatorȱasȱtheȱamountȱofȱmoneyȱ that,ȱifȱinvestedȱatȱtheȱvaluationȱdate,ȱisȱexpectedȱtoȱbeȱsufficientȱtoȱpayȱoutȱfutureȱpensionȱbenefitsȱthatȱ haveȱbeenȱearnedȱbyȱpastȱservice.ȱ

8 The term ‘defined benefit’ is used here because it is often used in legislation to determine which plans fall within the scope of funding regulations.

9

6.10ȱ Aȱtechnicalȱprovisionȱisȱalsoȱdescribedȱasȱaȱfundingȱtarget.ȱȱCharacteristicsȱofȱitsȱmeasurementȱ includeȱtheȱfollowing:ȱ

x itȱisȱspecificȱtoȱanȱindividualȱplanȱ x itȱisȱaȱprudentȱmeasureȱȱ

x itsȱmeasurementȱisȱlessȱprescriptiveȱthanȱtheȱrequirementsȱforȱmeasuringȱpensionȱliabilitiesȱinȱ presentȱaccountingȱstandardsȱ

x itȱmayȱtakeȱintoȱaccountȱtheȱstrengthȱofȱtheȱemployer’sȱcovenant,ȱi.e.ȱreflectingȱtheȱabilityȱofȱtheȱ employerȱtoȱstepȱinȱandȱcontributeȱmoreȱcashȱifȱtheȱplan’sȱassetsȱareȱinsufficientȱtoȱmeetȱitsȱ obligationsȱ

x theȱdiscountȱrateȱmayȱassumeȱanȱelementȱofȱexpectedȱreturnsȱonȱequitiesȱifȱitȱisȱconsideredȱ prudentȱ(e.g.ȱifȱtheȱemployer’sȱcovenantȱisȱsufficientlyȱstrong).ȱ

6.11ȱ Aȱconsequenceȱofȱtheȱaboveȱisȱthatȱaȱsponsoringȱemployerȱwithȱaȱweakȱcovenantȱwill,ȱallȱotherȱ thingsȱbeingȱequal,ȱbeȱsubjectȱtoȱaȱhigherȱtechnicalȱprovisionȱthanȱanȱemployerȱwithȱaȱstrongȱcovenant.ȱ 6.12ȱ Legislationȱinȱdifferentȱcountriesȱresultsȱinȱdifferentȱlevelsȱofȱtechnicalȱprovisionsȱ(someȱrequireȱ greaterȱmarginsȱforȱprudenceȱthanȱothers).ȱȱHowever,ȱtheȱconsequencesȱofȱaȱplan’sȱassetsȱfallingȱshortȱofȱ itsȱtechnicalȱprovisionsȱareȱcommon:ȱaȱrecoveryȱplanȱmustȱbeȱputȱinȱplaceȱthatȱcommitsȱtheȱemployerȱtoȱ makeȱgoodȱtheȱshortfall,ȱi.e.ȱthisȱisȱinȱeffectȱaȱdebtȱonȱtheȱemployer.ȱ

6.13ȱ Regulatorsȱcanȱsetȱaȱframeworkȱforȱfundingȱwhichȱresultsȱinȱfundingȱtargetsȱeitherȱaboveȱorȱbelowȱ theȱlevelȱofȱliabilitiesȱasȱcalculatedȱforȱfinancialȱreportingȱpurposesȱunderȱpresentȱaccountingȱmeasuresȱofȱ liabilities.ȱȱItȱwouldȱseemȱthatȱdivergenceȱisȱinevitableȱunlessȱtheȱregulatorȱhasȱtheȱsameȱexpectationȱaboutȱ theȱacceptableȱlevelȱofȱsecurityȱasȱisȱimplicitȱinȱtheȱlevelȱcalculatedȱforȱfinancialȱreportingȱpurposes.ȱ Shouldȱtechnicalȱprovisionsȱ(orȱotherȱfundingȱmeasures)ȱbeȱusedȱasȱfinancialȱreportingȱmeasuresȱofȱ liabilities?10ȱ

6.14ȱ Sponsoringȱemployersȱthatȱoperateȱunderȱtheȱtechnicalȱprovisionȱregimeȱareȱcommittedȱtoȱ fundingȱonȱthatȱbasis.ȱȱTheȱamountȱofȱtechnicalȱprovisionȱthatȱisȱdeterminedȱforȱanyȱplanȱwillȱthereforeȱ haveȱaȱdirectȱimpactȱonȱtheȱlevelȱandȱtimingȱofȱfutureȱcashȱoutflowsȱofȱtheȱemployer.ȱȱSomeȱwouldȱ thereforeȱargueȱthatȱtechnicalȱprovisionsȱ(orȱotherȱcomparableȱfundingȱmeasures)ȱareȱmostȱrelevantȱinȱ assessingȱtheȱentity’sȱfutureȱcashȱoutflowsȱrelatingȱtoȱitsȱpensionȱobligationsȱandȱshouldȱbeȱusedȱasȱanȱ appropriateȱmeasureȱofȱtheȱliabilityȱinȱtheȱsponsoringȱemployer’sȱfinancialȱstatements.ȱ

10 This Chapter is concerned with the sponsoring employer’s financial statements. Chapter 11 discusses the same issue from the perspective of the pension plan’s financial statements.

6.15ȱ Thisȱpaperȱdoesȱnotȱsupportȱtheȱideaȱthatȱregulatoryȱmeasuresȱofȱliabilitiesȱtoȱpayȱbenefitsȱshouldȱ replaceȱmeasuresȱderivedȱfromȱgeneralȱaccountingȱprinciples,ȱbecauseȱtheirȱprincipalȱpurposeȱconcernsȱ theȱsolvencyȱofȱpensionȱplans,ȱbyȱspecifyingȱaȱlevelȱofȱassetsȱthatȱmustȱbeȱsetȱasideȱinȱseparateȱfundsȱtoȱbeȱ availableȱtoȱmeetȱtheȱobligationȱtoȱpayȱbenefits.ȱȱThusȱtheyȱdoȱnotȱpurportȱtoȱprovideȱfinancialȱstatementȱ usersȱwithȱdecisionȬusefulȱinformationȱperȱseȱaboutȱtheȱamountȱofȱtheȱunderlyingȱobligationȱtoȱpayȱ benefits.ȱ

6.16ȱ Regulatoryȱmeasuresȱthatȱareȱusedȱtoȱdetermineȱaȱprescribedȱlevelȱofȱfundingȱclearlyȱgiveȱriseȱtoȱ cashȱoutflowsȱfromȱtheȱentity’sȱgeneralȱresourcesȱintoȱtheȱresourcesȱthatȱareȱsetȱasideȱtoȱprovideȱseparateȱ fundsȱforȱtheȱpaymentȱofȱbenefits.ȱȱButȱtheȱfollowingȱpointsȱmayȱbeȱnotedȱinȱsupportȱofȱtheȱviewȱthatȱ regulatoryȱmeasuresȱmayȱnotȱprovideȱtheȱmostȱappropriateȱaccountingȱvaluesȱofȱtheȱobligationȱtoȱpayȱ benefits:ȱ

x regulatoryȱmeasuresȱdoȱnotȱreflectȱtheȱfullȱextentȱofȱtheȱunderlyingȱobligationȱbecause,ȱasȱnotedȱ above,ȱtheyȱmayȱunderstateȱtheȱpotentialȱliabilityȱofȱtheȱsponsorȱbecauseȱofȱtheȱwayȱtheȱ

employer’sȱcovenantȱisȱreflected;ȱ

x ifȱsuchȱmeasuresȱwereȱusedȱtoȱreportȱtheȱemployer’sȱliability,ȱanȱemployerȱwithȱaȱweakȱcreditȱ ratingȱwouldȱreportȱaȱlargerȱliabilityȱthanȱanȱemployerȱwithȱaȱstrongȱcreditȱratingȱforȱtheȱsameȱ underlyingȱbenefitȱobligation,ȱwhichȱhasȱtheȱoppositeȱeffectȱtoȱthatȱwhenȱcreditȱriskȱisȱreflectedȱinȱ theȱmeasurementȱofȱotherȱliabilities,ȱbecauseȱreflectingȱgreaterȱcreditȱriskȱconventionallyȱleadsȱtoȱ smallerȱliabilitiesȱ(seeȱSectionȱ7);ȱȱ

x regulatoryȱmeasuresȱinȱdifferentȱcountriesȱmayȱnotȱbeȱcomparableȱbecauseȱdifferentȱ governmentsȱprescribeȱdifferentȱfundingȱtargets.ȱȱȱ

6.17 Theȱdebateȱaboutȱregulatoryȱmeasuresȱhasȱsimilaritiesȱtoȱtheȱdebateȱaboutȱactuarialȱmeasuresȱofȱ liabilitiesȱthatȱprecededȱtheȱpresentȱpensionsȱaccountingȱstandards.ȱȱSuchȱmeasuresȱtendȱtoȱassumeȱthatȱ partȱofȱtheȱliabilityȱwillȱbeȱmetȱoutȱofȱfutureȱcashȱflowsȱfromȱassetsȱandȱignoreȱtheȱemployer’sȱobligationȱ toȱpayȱmoreȱcontributionsȱifȱtheȱassetsȱdoȱnotȱperformȱasȱexpected.ȱȱTheȱviewȱthatȱsuchȱmeasuresȱdoȱnotȱ provideȱcurrentȱvaluesȱofȱtheȱliabilityȱisȱarticulatedȱinȱtheȱfollowingȱextract:ȱ

ȱ “Itȱisȱimportantȱtoȱappreciateȱthatȱvaluationȱisȱnotȱtheȱfinalȱobjectiveȱofȱaȱfundingȱmethodology.ȱȱ Instead,ȱtheȱultimateȱrequirementȱisȱtoȱcomeȱupȱwithȱaȱfundingȱplan,ȱconfirmingȱthat,ȱunderȱ plausibleȱbusinessȱassumptions,ȱtheȱassetsȱareȱsufficientȱtoȱpayȱbenefitsȱorȱthatȱassetsȱplusȱfutureȱ contributionsȱwillȱbeȱenoughȱtoȱpayȱfutureȱbenefits.ȱȱIfȱtheȱassetsȱareȱexpectedȱtoȱearnȱaȱhighȱ return,ȱforȱexample,ȱonȱaccountȱofȱtheirȱriskiness,ȱitȱcouldȱbeȱarguedȱthatȱitȱisȱappropriateȱtoȱtakeȱ thisȱintoȱaccountȱwhenȱdrawingȱupȱaȱfundingȱplan,ȱparticularlyȱgivenȱtheȱspecialȱcircumstancesȱ ofȱhavingȱanȱunderlyingȱpromiseȱtoȱpayȱfromȱtheȱemployer….ȱȱInȱotherȱwords,ȱalthoughȱtheȱ fundingȱbasisȱisȱweakȱandȱtheȱpensionȱfundȱassetsȱmayȱnotȱbeȱsufficientȱtoȱmeetȱtheȱpromisedȱ benefits,ȱtheȱadditionalȱsecurityȱaffordedȱbyȱtheȱemployerȱresultsȱinȱanȱoverallȱacceptableȱlevelȱofȱ risk.ȱȱTheȱliabilitiesȱareȱnotȱbeingȱ‘valued’ȱbutȱratherȱbudgetedȱfor.”ȱ

ȱ (Exley,ȱMehtaȱandȱSmithȱ1997ȱ‘Theȱfinancialȱtheoryȱofȱdefinedȱbenefitȱpensionȱschemes’,ȱparaȱ 3.2.5)ȱ

6.18ȱ Althoughȱthisȱpaperȱtakesȱtheȱpositionȱthatȱregulatoryȱmeasuresȱareȱforȱfunding,ȱnotȱaccounting,ȱ usersȱmayȱbeȱinterestedȱinȱknowingȱwhatȱsuchȱregulatoryȱmeasuresȱare,ȱbecauseȱofȱtheȱcloseȱrelationshipȱ betweenȱthemȱandȱcontributionȱrequirementsȱ(includingȱrecoveryȱplans).ȱȱTheȱcaseȱforȱdisclosureȱofȱ alternativeȱmeasuresȱofȱliabilities,ȱincludingȱregulatoryȱmeasures,ȱisȱdiscussedȱinȱChapterȱ9.ȱ

6.19ȱ Thisȱpaperȱconcludesȱthatȱregulatoryȱmeasuresȱofȱliabilitiesȱtoȱpayȱpensionsȱshouldȱnotȱreplaceȱ measuresȱderivedȱfromȱgeneralȱaccountingȱprinciples.ȱȱȱ

‘RunȬoff’ȱandȱ‘buyȬout’ȱmeasuresȱ

6.20ȱ Weȱuseȱtheȱtermȱ‘runȬoff’ȱasȱshorthandȱforȱtheȱsituationȱwhereȱtheȱemployerȱcontinuesȱtoȱ administerȱtheȱliabilitiesȱandȱpaysȱbenefitsȱwhenȱtheyȱfallȱdue,ȱeitherȱfromȱitsȱinternalȱresourcesȱorȱfromȱ assetsȱthatȱhaveȱpreviouslyȱbeenȱsetȱaside.ȱ

6.21ȱ Inȱtheȱpresentȱstateȱofȱmarketsȱforȱsuchȱliabilities,ȱtheȱpriceȱofȱbuyingȱoutȱisȱoftenȱhigherȱthanȱaȱ

‘runȬoff’ȱmeasureȱ(asȱcalculatedȱunderȱpresentȱpensionsȱaccountingȱstandards)ȱbecauseȱaȱpotentialȱ transfereeȱwouldȱfactorȱthingsȱintoȱtheȱpriceȱthatȱtheȱentityȱwouldȱnot.ȱȱIfȱtheȱpricesȱwereȱtheȱsame,ȱtheȱ entityȱshouldȱbeȱindifferentȱasȱtoȱwhetherȱtoȱtransferȱtheȱliabilityȱorȱcontinueȱtoȱholdȱit.ȱ

6.22ȱ Reasonsȱwhyȱtheȱmeasuresȱmightȱbeȱdifferentȱincludeȱtheȱfollowing:ȱ

(a)ȱ Theȱtransfereeȱentityȱwouldȱtypicallyȱbeȱanȱinsuranceȱentity.11ȱȱPensionsȱandȱinsuranceȱactivitiesȱ mayȱbeȱsubjectȱtoȱdifferentȱregulatoryȱregimes.ȱȱIfȱanȱinsuranceȱentityȱisȱsubjectȱtoȱstricterȱ regulatoryȱcapitalȱrequirements,ȱaȱliabilityȱtransferredȱtoȱitȱwillȱhaveȱlessȱcreditȱriskȱafterȱitsȱ

transfer.ȱȱThisȱwouldȱaddȱvalueȱtoȱtheȱliabilityȱ(and,ȱfromȱtheȱemployee’sȱperspective,ȱaddȱvalueȱtoȱ hisȱorȱherȱrightȱtoȱreceiveȱbenefits).ȱȱȱ

(b) Participantsȱinȱtheȱmarketȱmakeȱdifferentȱriskȱassessmentsȱrelatingȱtoȱtheȱliabilityȱthanȱtheȱentity.ȱȱ Forȱexample,ȱriskȱappetitesȱmayȱdifferȱbetweenȱtheȱentityȱandȱanyȱpotentialȱtransfereeȱinȱrelationȱ toȱmortalityȱriskȱ(theȱtransfereeȱisȱlikelyȱtoȱbeȱmoreȱriskȱaverse),ȱwhichȱwouldȱbeȱreflectedȱinȱtheȱ compensationȱthatȱtheȱtransfereeȱwouldȱrequireȱforȱassumingȱthatȱrisk.ȱȱ(Thisȱreasonȱisȱprobablyȱ linkedȱtoȱtheȱpointȱinȱ(a)ȱ–ȱtoȱsustainȱaȱhighȱcreditȱrating,ȱaȱtransfereeȱwouldȱbeȱlikelyȱtoȱmakeȱ moreȱconservativeȱassumptionsȱaboutȱmortalityȱrisk.)ȱȱ

(c) Participantsȱinȱtheȱmarketȱdemandȱaȱpremiumȱforȱtheȱriskȱthatȱtheȱinformationȱprovidedȱbyȱtheȱ entityȱisȱincompleteȱorȱmisleadingȱ–ȱinȱotherȱwords,ȱaȱpurchaserȱmayȱbeȱlessȱsureȱthanȱtheȱsellerȱ exactlyȱwhatȱrisksȱitȱisȱtakingȱon.ȱȱȱ

11 That is, on a going concern basis. The transferee entity could be a statutory protection fund, but that would typically come into play in an insolvency situation.

(d) Futureȱexpensesȱofȱadministeringȱtheȱliabilityȱwouldȱbeȱfactoredȱintoȱtheȱpriceȱthatȱaȱtransfereeȱ wouldȱrequireȱ–ȱcurrentlyȱtheyȱareȱusuallyȱexcludedȱfromȱtheȱmeasurementȱofȱtheȱliabilityȱonȱanȱ ongoingȱbasis.ȱ(However,ȱthisȱpaperȱproposesȱthatȱexpensesȱofȱsettlingȱtheȱliabilityȱshouldȱbeȱ includedȱinȱbothȱmeasuresȱ–ȱseeȱSectionȱ8.)ȱ

(e) Theȱtransfereeȱwillȱonlyȱacceptȱaȱtransferȱatȱaȱpriceȱthatȱincludesȱsomeȱprofitȱ–ȱevenȱwhenȱallȱofȱtheȱ aboveȱ(andȱanyȱotherȱfactors,ȱsuchȱasȱtheȱcostȱofȱservicingȱregulatoryȱcapital)ȱhaveȱbeenȱtakenȱintoȱ account.ȱȱȱ

6.23ȱ Someȱhaveȱsuggestedȱthatȱtheȱgapȱbetweenȱ‘runȬoff’ȱandȱ‘buyȬout’ȱmeasuresȱwillȱbecomeȱsmallerȱ asȱmoreȱentitiesȱenterȱtheȱtransferȱmarket,ȱincludingȱentitiesȱthatȱareȱnotȱsubjectȱtoȱtheȱmoreȱstringentȱ insuranceȱregulations.ȱȱȱ

6.24ȱ TheȱmeasurementȱbasisȱinȱIASȱ37ȱ(andȱitsȱproposedȱrevision)ȱforȱprovisions12ȱprovidesȱaȱusefulȱ startingȱpoint.ȱȱItȱreflectsȱtheȱlowestȱamountȱthatȱanȱentityȱwouldȱrationallyȱpayȱonȱtheȱbalanceȱsheetȱdateȱtoȱ beȱrelievedȱofȱtheȱobligation.ȱȱTheȱobjectiveȱwouldȱthereforeȱbeȱtoȱreportȱaȱcurrentȱsettlementȱamount,ȱbutȱ itȱwouldȱappearȱtoȱruleȱoutȱaȱbuyȬoutȱmeasureȱthatȱtheȱentityȱwouldȱnotȱrationallyȱpay.ȱȱȱThereȱwillȱoften,ȱ therefore,ȱbeȱnoȱrationalȱalternativeȱtoȱrunningȱoffȱtheȱliability.ȱȱ

6.25ȱ Aȱcurrentȱvalueȱmeasureȱofȱfutureȱpaymentsȱofȱpensionȱbenefitsȱreflectsȱtoday’sȱvalueȱofȱtheȱfutureȱ cashȱoutflowsȱexpectedȱtoȱsettleȱtheȱliabilityȱwhenȱitȱfallsȱdue.ȱȱThisȱwouldȱusuallyȱbeȱtheȱamountȱthatȱfulfilsȱtheȱ objectiveȱinȱparagraphȱ5.14,ȱbecauseȱaȱbuyȬoutȱamountȱwouldȱusuallyȱbeȱhigher.ȱȱHowever,ȱifȱtheȱliabilityȱ couldȱbeȱtransferredȱforȱaȱlowerȱamount,ȱreportingȱtheȱliabilityȱatȱthatȱlowerȱamountȱwouldȱfulfilȱtheȱ objective.ȱ

IASB’sȱproposalsȱforȱinsuranceȱliabilitiesȱ

6.26ȱ Itȱisȱusefulȱtoȱreadȱacrossȱfromȱtheȱapproachȱtoȱmeasurementȱofȱinsuranceȱliabilitiesȱthatȱisȱ advocatedȱinȱIASB’sȱDiscussionȱPaperȱ‘PreliminaryȱViewsȱonȱInsuranceȱContracts’ȱ(Mayȱ2007).ȱȱThatȱ paperȱsetsȱoutȱthreeȱbasicȱ‘buildingȱblocks’ȱforȱmeasuringȱinsuranceȱliabilitiesȱwhenȱaȱpresentȱvalueȱ measurementȱisȱrequired:ȱ

(a)ȱ explicit,ȱunbiased,ȱmarketȬconsistent,ȱprobabilityȱweightedȱandȱcurrentȱestimatesȱofȱtheȱ contractualȱcashȱflowsȱ

(b)ȱ currentȱmarketȱdiscountȱratesȱthatȱadjustȱtheȱestimatedȱfutureȱcashȱflowsȱforȱtheȱtimeȱvalueȱofȱ moneyȱ

(c)ȱ aȱriskȱmarginȱreflectingȱtheȱmarginȱthatȱmarketȱparticipantsȱrequireȱforȱbearingȱriskȱ(andȱaȱserviceȱ marginȱinȱrespectȱofȱotherȱservicesȱprovided,ȱifȱany).ȱ

12

6.27ȱ Theȱaboveȱapproachȱtoȱmeasurementȱisȱdescribedȱasȱcurrentȱexitȱvalue,ȱalthoughȱitȱmayȱbeȱnotedȱ thatȱtheȱIASBȱhasȱstatedȱthatȱitȱhasȱnotȱidentifiedȱsignificantȱdifferencesȱbetweenȱthatȱapproachȱandȱfairȱ value.ȱȱTheyȱbothȱpurportȱtoȱreflectȱtheȱamountȱanȱentityȱwouldȱhaveȱtoȱpayȱtoȱtransferȱaȱliabilityȱtoȱ anotherȱentityȱatȱtheȱreportingȱdate.ȱȱ(Aȱdescriptionȱofȱtheȱcharacteristicsȱofȱaȱfairȱvalueȱmeasurementȱforȱ liabilitiesȱinȱtheȱIASB’sȱDiscussionȱPaperȱ‘FairȱValueȱMeasurements’ȱ(Novemberȱ2006)ȱisȱgivenȱinȱ

AppendixȱD.)ȱȱCurrentȱexitȱvalueȱ(orȱfairȱvalue)ȱdiffersȱsignificantlyȱfromȱtheȱmeasurementȱapproachȱinȱ IASȱ19ȱandȱitȱisȱclearȱthatȱtheȱIASȱ19ȱapproachȱgenerallyȱproducesȱaȱlowerȱmeasureȱofȱaȱliability:ȱ

Insuranceȱliabilitiesȱ(IASBȱDP)ȱ Pensionȱliabilitiesȱ(IASȱ19)ȱ

Expectedȱvalueȱofȱcashȱflowsȱ(marketȬ consistentȱestimates)ȱ

Expectedȱvalueȱofȱcashȱflowsȱ(entity’sȱ bestȱestimates)ȱ

DiscountȱatȱriskȬfreeȱrateȱ Discountȱatȱhighȱqualityȱcorporateȱbondȱ rateȱ

Addȱaȱmarketȱmarginȱ Noȱmarginȱaddedȱ

6.28ȱ Someȱdisagreeȱwithȱcertainȱimplicationsȱofȱusingȱfairȱvalueȱ(orȱcurrentȱexitȱvalue)ȱasȱaȱ measurementȱobjectiveȱforȱpensionȱliabilities.ȱȱViewsȱincludeȱtheȱfollowing:ȱ

(a)ȱ Someȱconsiderȱfairȱvalueȱ(orȱmarketȬbasedȱexitȱvalueȱasȱitȱisȱdescribedȱinȱtheȱIASB’sȱFairȱValueȱ DiscussionȱPaper)ȱtoȱbeȱanȱinappropriateȱmeasurementȱobjectiveȱwhenȱ(asȱisȱusuallyȱtheȱcase)ȱ pensionȱliabilitiesȱareȱnotȱtradedȱinȱactiveȱmarkets,ȱbecauseȱextensiveȱuseȱwouldȱbeȱmadeȱofȱ valuationȱtechniquesȱusingȱinputsȱinȱtheȱ‘Levelȱ2’ȱandȱ‘Levelȱ3’ȱcategories.ȱ

(b)ȱ Marketsȱtoȱwhichȱanȱentityȱmightȱhaveȱaccessȱ(e.g.ȱtransferȱofȱaȱliabilityȱtoȱanȱinsuranceȱcompany,ȱ orȱ‘buyȱout’)ȱdoȱnotȱgiveȱriseȱtoȱtransactionsȱthatȱareȱcomparableȱtoȱtheȱhypotheticalȱtransactionsȱ envisaged.ȱȱThatȱcouldȱleadȱtoȱanȱentityȱhavingȱtoȱreportȱaȱprohibitivelyȱexpensiveȱtransferȱ amountȱwhenȱitȱwouldȱnotȱrationallyȱpayȱthatȱamountȱtoȱdischargeȱitsȱobligation.ȱȱȱ

(c)ȱ Aȱfairȱvalueȱmeasurementȱexplicitlyȱrequiresȱtheȱcreditȱ(orȱnonȬperformance)ȱriskȱrelatingȱtoȱthatȱ liabilityȱtoȱbeȱreflected.ȱȱThusȱitȱseemsȱclearȱthatȱifȱtheȱmeasurementȱobjectiveȱisȱfairȱvalueȱ(orȱ currentȱexitȱvalue),ȱfundingȱorȱcollateralisationȱofȱtheȱliabilityȱwillȱincreaseȱitsȱfairȱvalueȱandȱ shouldȱbeȱtakenȱintoȱaccountȱinȱitsȱmeasurement.ȱȱSomeȱbelieveȱitȱisȱinappropriateȱtoȱincludeȱ creditȱ(orȱnonȬperformance)ȱriskȱinȱtheȱmeasurementȱofȱpensionȱliabilitiesȱ(differentȱviewpointsȱ areȱconsideredȱinȱSectionȱ7).ȱ

(d)ȱ Aȱtransfereeȱwouldȱonlyȱacceptȱaȱtransferȱatȱaȱpriceȱthatȱincludesȱsomeȱprofit.ȱȱSomeȱbelieveȱthatȱ theȱinclusionȱofȱsomeoneȱelse’sȱprofitȱmarginȱinȱtheȱmeasurementȱofȱanȱentity’sȱownȱliabilitiesȱ doesȱnotȱnecessarilyȱprovideȱusefulȱinformationȱaboutȱtheȱamount,ȱtimingȱandȱuncertaintyȱofȱcashȱ outflowsȱfromȱtheȱliabilityȱthatȱtheȱentityȱholds.ȱȱSomeȱbelieveȱthatȱthisȱpointȱappliesȱmoreȱ

generallyȱtoȱtheȱassumptionsȱthatȱunderlieȱaȱhypotheticalȱtransferȱprice,ȱparticularlyȱwhenȱnoȱ

marketȱexistsȱtoȱtransferȱtheȱliability.ȱȱ(Othersȱdoȱnotȱbelieveȱthisȱisȱaȱvalidȱargumentȱbecauseȱtheȱ entityȱholdingȱtheȱliabilityȱalsoȱrequiresȱaȱprofitȱtoȱachieveȱaȱreturnȱonȱitsȱownȱequity;ȱinȱtheirȱ view,ȱthisȱprofitȱrequirementȱ–ȱor,ȱmoreȱcorrectly,ȱcompensationȱtoȱtheȱequityȱforȱriskȱwhenȱ holdingȱriskyȱassetsȱandȱliabilitiesȱ–ȱisȱtheȱsameȱasȱaȱbuyerȱwouldȱrequire.ȱȱHence,ȱinȱtheirȱview,ȱ thereȱwouldȱbeȱnoȱdifferenceȱinȱpricingȱbetweenȱaȱtransfereeȱandȱtheȱvalueȱtheȱentityȱowningȱtheȱ liabilityȱwouldȱcalculateȱbasedȱonȱthisȱargument.)ȱȱ

(e)ȱ Someȱbelieveȱthatȱtheȱobjectiveȱonȱinitialȱrecognitionȱ–ȱtoȱmeasureȱtheȱliabilityȱincurredȱinȱ exchangeȱforȱtheȱservicesȱrenderedȱ(asȱdiscussedȱinȱSectionȱ4)ȱ–ȱsuggestsȱthatȱanȱentryȱvalueȱ measurementȱobjective,ȱreflectingȱtheȱpriceȱthatȱwouldȱbeȱreceivedȱtoȱassumeȱtheȱliability,ȱisȱmoreȱ appropriateȱthatȱanȱexitȱvalueȱmeasurementȱobjective,ȱwhichȱreflectsȱwhatȱtheȱentityȱwouldȱhaveȱtoȱ payȱtoȱtransferȱtheȱliability.ȱ

(f)ȱ Untilȱfurtherȱworkȱisȱdoneȱonȱdefiningȱtheȱingredientsȱofȱfairȱvalueȱforȱliabilitiesȱgenerally,ȱitȱ wouldȱbeȱdifficultȱtoȱdetermineȱwhetherȱtheȱapproachȱtakenȱinȱChapterȱ2ȱinȱrelationȱtoȱdefiningȱaȱ pensionȱliabilityȱwouldȱbeȱaffectedȱbyȱaȱfairȱvalueȱmeasurementȱobjective.ȱȱForȱexample,ȱthisȱpaperȱ hasȱapproachedȱtheȱissueȱofȱwhetherȱfutureȱsalaryȱincreasesȱshouldȱbeȱreflectedȱinȱtheȱ

measurementȱofȱaȱliabilityȱasȱanȱinterpretationȱofȱtheȱdefinitionȱofȱaȱliability,ȱandȱisȱnotȱdependentȱ onȱconclusionsȱonȱhowȱtheȱliabilityȱshouldȱbeȱmeasured.ȱ

6.29ȱ Onȱtheȱotherȱhand,ȱsomeȱbelieveȱthatȱanyȱapproachȱshouldȱbeȱconsistentȱwithȱusingȱfairȱvalueȱifȱ deepȱandȱliquidȱmarketsȱinȱtheȱtransferȱofȱpensionȱliabilitiesȱwereȱtoȱdevelopȱinȱtheȱfuture.ȱȱTheyȱwouldȱ thenȱbeȱmoreȱcomfortableȱthatȱanȱexitȱvalueȱapproachȱ(interpretedȱinȱthisȱcaseȱasȱtheȱcurrentȱmarketȱprice)ȱ wouldȱgiveȱtheȱmostȱappropriateȱmeasureȱofȱtheȱliabilityȱatȱtheȱbalanceȱsheetȱdate.ȱȱȱ

6.30ȱ Asȱdiscussedȱabove,ȱitȱisȱtheȱabsenceȱofȱanȱactiveȱmarketȱforȱtransferringȱpensionȱliabilitiesȱthatȱ causesȱmanyȱtoȱdoubtȱthatȱfairȱvalueȱ(asȱdescribedȱinȱtheȱmostȱrecentȱliterature)ȱisȱtheȱmostȱappropriateȱ measurementȱobjective.ȱȱTheyȱbelieveȱinȱanȱapproachȱthatȱdoesȱnotȱincludeȱanotherȱparty’sȱprofitȱmarginȱ orȱriskȱmarginȱinȱtheȱmeasurementȱofȱanȱentity’sȱownȱliabilities.ȱȱThisȱapproachȱmightȱbeȱviewedȱasȱanȱ

‘entityȬspecific’ȱmeasurement,ȱbecauseȱitȱaimsȱtoȱreflectȱnotȱonlyȱtheȱpropertiesȱofȱtheȱliabilityȱitselfȱbutȱ alsoȱtheȱrelationshipȱtoȱitsȱowner.13ȱȱSomeȱbelieveȱanȱentityȬspecificȱmeasurementȱisȱappropriate,ȱ particularlyȱwhenȱthereȱisȱnoȱtransferȱmarketȱforȱtheȱliabilityȱ(exceptȱperhapsȱaȱtransferȱtoȱanȱinsuranceȱ entity).ȱȱWeȱmightȱexpectȱmarketȬbasedȱmeasuresȱandȱentityȬspecificȱmeasuresȱtoȱconverge,ȱhowever,ȱasȱ theȱtimeȱhorizonȱofȱtheȱliabilityȱdecreasesȱandȱuncertaintyȱisȱreduced.ȱȱȱȱ

EntityȬspecificȱvalueȱcomparedȱwithȱcurrentȱexitȱvalue/fairȱvalueȱ

6.31ȱ Ifȱanȱ‘entityȬspecific’ȱmeasurementȱwereȱusedȱforȱpensionȱliabilities,ȱhowȱmightȱitȱdifferȱfromȱtheȱ proposedȱcurrentȱexitȱvalueȱmodelȱforȱinsuranceȱliabilities?ȱ

13 IASB’s Glossary of Terms describes an entity-specific value of a liability as “the present value of the

6.32ȱ Inȱmanyȱcases,ȱexceptȱforȱtheȱinclusionȱofȱcreditȱriskȱinȱcurrentȱexitȱvalue,ȱweȱwouldȱnotȱexpectȱtheȱ twoȱapproachesȱtoȱdiffer.ȱȱForȱexample:ȱ

x forȱbenefitsȱthatȱdependȱonȱtheȱvalueȱofȱaȱpoolȱofȱassetsȱ(actualȱorȱnotional),ȱtheȱliabilityȱwouldȱ beȱmeasuredȱunderȱeitherȱapproachȱbyȱreferenceȱtoȱtheȱcurrentȱmarketȱvaluesȱofȱthoseȱassetsȱ x forȱbenefitsȱthatȱdependȱonȱtheȱvalueȱofȱaȱpoolȱofȱassetsȱandȱinclude,ȱadditionally,ȱaȱguaranteeȱ

givenȱbyȱtheȱemployerȱrelatedȱtoȱtheȱassets’ȱinvestmentȱperformance,ȱtheȱliabilityȱinȱrespectȱofȱ theȱguaranteeȱwouldȱbeȱmeasuredȱlikeȱaȱderivativeȱfinancialȱinstrument.ȱ

6.33ȱ Forȱotherȱtypesȱofȱbenefits,ȱsuchȱasȱpensionsȱthatȱdependȱonȱlengthȱofȱserviceȱandȱsalary,ȱaȱcurrentȱ valueȱmeasureȱwillȱbeȱderivedȱfromȱdiscountingȱexpectedȱfutureȱcashȱflows.ȱȱReturningȱtoȱtheȱthreeȱ

‘buildingȱblocks’ȱsetȱoutȱinȱparagraphȱ6.26ȱabove,ȱtheȱfollowingȱpointsȱmayȱbeȱnoted.ȱ Expectedȱvalueȱofȱcashȱflowsȱ

6.34ȱ Inȱgeneral,ȱtheȱmeasuresȱofȱcashȱoutflowsȱinȱbuildingȱblockȱ(a)ȱunderȱtheȱtwoȱapproachesȱwouldȱ notȱbeȱexpectedȱtoȱdifferȱsignificantly.ȱȱWhilstȱanȱentityȬspecificȱapproachȱwouldȱallowȱanȱentityȱtoȱfactorȱ itsȱownȱbestȱestimatesȱintoȱmeasurements,ȱitȱwouldȱnotȱentitleȱmanagementȱtoȱignoreȱmarketȱevidenceȱofȱ value.ȱȱInȱotherȱwords,ȱanȱentityȱshouldȱuseȱmarketȬconsistentȱinformationȱwhenȱitȱisȱavailableȱandȱ relevantȱtoȱtheȱentity.ȱȱThoseȱwhoȱsupportȱanȱentityȬspecificȱapproachȱneverthelessȱbelieveȱitȱwouldȱbeȱ wrongȱtoȱuseȱinformationȱthatȱisȱinconsistentȱwithȱinformationȱthatȱisȱavailableȱinȱtheȱmarket.ȱȱȱ

6.35ȱ Onȱtheȱotherȱhand,ȱifȱanȱentityȱhasȱbetterȱinformationȱaboutȱspecificȱattributesȱofȱitsȱliability,ȱsomeȱ believeȱitȱshouldȱuseȱthatȱbecauseȱinȱtheirȱviewȱitȱisȱmoreȱrelevantȱtoȱunderstandingȱtheȱentity’sȱfinancialȱ position.ȱȱForȱexample,ȱitȱmightȱnotȱbeȱappropriateȱtoȱinsistȱonȱmarketȬbasedȱmeasuresȱforȱmortalityȱ assumptions,ȱsinceȱmortalityȱratesȱcanȱbeȱspecificȱtoȱanȱentityȱ(suchȱasȱwhenȱanȱentityȱknowsȱthatȱtheȱ longevityȱofȱitsȱworkforceȱisȱnotȱasȱgoodȱasȱtheȱmarketȱview).ȱȱSimilarly,ȱfutureȱexpensesȱofȱadministeringȱ theȱliabilityȱareȱlikelyȱtoȱbeȱentityȬspecificȱestimatesȱunderȱthisȱapproach.ȱ

6.36ȱ Discussionȱconcerningȱtheȱdefinitionȱofȱliabilitiesȱ(inȱChapterȱ2)ȱhasȱsetȱoutȱdifferentȱviewsȱonȱ whetherȱtheȱlevelȱofȱfutureȱpensionableȱsalariesȱorȱestimatesȱofȱfutureȱdiscretionaryȱpensionȱincreasesȱ shouldȱbeȱfactoredȱintoȱtheȱmeasurementȱofȱtheȱliability.ȱȱIfȱeitherȱofȱthoseȱpossibleȱfutureȱbenefitsȱwereȱ reflected,ȱitȱseemsȱthatȱunderȱeitherȱapproachȱanȱentity’sȱownȱbestȱestimatesȱwouldȱbeȱrequiredȱofȱtheȱcashȱ outflowsȱneededȱtoȱsettleȱthoseȱelementsȱofȱtheȱliability,ȱbecauseȱitȱwouldȱnotȱbeȱpossibleȱtoȱtransferȱsuchȱ aȱliabilityȱtoȱanotherȱentityȱandȱnoȱotherȱ‘marketȱconsistent’ȱestimateȱcouldȱbeȱmade.ȱ

Currentȱmarketȱdiscountȱratesȱforȱtheȱtimeȱvalueȱofȱmoneyȱ

6.37ȱ Theȱdiscountȱrateȱinȱbuildingȱblockȱ(b)ȱwouldȱunderȱeitherȱapproachȱbeȱpurelyȱforȱtheȱtimeȱvalueȱ ofȱmoney,ȱi.e.ȱaȱriskȬfreeȱrate.ȱȱThereȱisȱlittleȱguidanceȱinȱtheȱinsuranceȱdiscussionȱpaperȱonȱdeterminingȱ thisȱrate,ȱexceptȱthatȱitȱisȱnotȱderivedȱfromȱexpectedȱreturnsȱonȱactualȱassetsȱheld.ȱȱContributorsȱtoȱthisȱ discussionȱpaperȱconcurȱwithȱthatȱview.ȱȱThereȱis,ȱhowever,ȱsomeȱdebateȱaboutȱwhetherȱaȱriskȬfreeȱrateȱisȱ

derivedȱfromȱaȱyieldȱcurveȱforȱgovernmentȱbondsȱorȱfromȱanȱinterestȱrateȱswapsȱcurveȱ(asȱaȱmoreȱliquidȱ alternativeȱwithȱlongerȱmaturitiesȱavailable),ȱandȱitȱisȱsuggestedȱthatȱfurtherȱconsiderationȱshouldȱbeȱ givenȱtoȱthis.ȱȱȱ

6.38ȱ Inȱcontrast,ȱIASȱ19ȱrequiresȱpensionȱliabilitiesȱtoȱbeȱdiscountedȱbyȱreferenceȱtoȱmarketȱyieldsȱatȱtheȱ balanceȱsheetȱdateȱonȱhighȱqualityȱcorporateȱbondsȱ(or,ȱinȱcountriesȱwhereȱthereȱisȱnoȱdeepȱmarketȱinȱsuchȱ bonds,ȱgovernmentȱbonds)ȱofȱaȱcurrencyȱandȱtermȱconsistentȱwithȱtheȱcurrencyȱandȱtermȱofȱtheȱ

obligation.ȱȱTheȱrelevantȱparagraphsȱfromȱtheȱIASC’sȱBasisȱforȱConclusionsȱtoȱIASȱ19ȱareȱincludedȱinȱ AppendixȱE.ȱ

6.39ȱ TheȱIASBȱdecidedȱ(paragraphȱ31ȱinȱtheȱBasisȱforȱConclusionsȱinȱAppendixȱE)ȱthatȱtheȱdiscountȱ rateȱshouldȱreflectȱtheȱtimeȱvalueȱofȱmoneyȱbutȱshouldȱnotȱattemptȱtoȱcaptureȱtheȱrisksȱassociatedȱwithȱaȱ definedȱbenefitȱobligationȱorȱanȱentityȇsȱownȱcreditȱrating.ȱȱTheyȱconsideredȱtheȱrateȱthatȱbestȱachievesȱ theseȱobjectivesȱisȱtheȱyieldȱonȱhighȱqualityȱcorporateȱbonds.ȱȱ(TheȱguidanceȱinȱSFASȱ87/SFASȱ106ȱalsoȱ takesȱratesȱofȱreturnȱonȱhighȬqualityȱfixedȬincomeȱinvestmentsȱasȱreflectingȱonlyȱtheȱtimeȱvalueȱofȱmoney).ȱȱ 6.40ȱ Onȱtheȱotherȱhand,ȱFRSȱ17ȱrelatesȱtheȱyieldȱonȱaȱhighȱqualityȱcorporateȱbondȱtoȱtheȱobjectiveȱofȱ reflectingȱaȱriskȬadjustedȱrate,ȱi.e.ȱaȱrateȱthatȱreflectsȱbothȱtheȱtimeȱvalueȱofȱmoneyȱandȱtheȱcharacteristicsȱofȱ theȱliability.ȱȱTheȱASB’sȱrationaleȱforȱtheȱaboveȱdiscountȱrateȱisȱsetȱoutȱinȱAppendixȱIVȱtoȱFRSȱ17.ȱȱTheȱ relevantȱparagraphsȱareȱincludedȱinȱAppendixȱFȱtoȱthisȱChapter.ȱȱItȱisȱnoteworthyȱthatȱaȱhigherȱthanȱriskȬ freeȱrateȱisȱjustifiedȱhereȱonȱtheȱgroundsȱofȱtheȱvariousȱoptionsȱavailableȱtoȱanȱemployerȱtoȱreduceȱ benefits,ȱorȱtoȱrefrainȱfromȱincreasingȱthem.ȱȱInȱeffect,ȱthatȱdiscountȱrateȱisȱintendedȱtoȱreflectȱtwoȱ offsettingȱfactors:ȱ(a)ȱaȱpriceȱforȱtheȱuncertaintyȱofȱfutureȱcashȱoutflowsȱ(whichȱincreasesȱtheȱvalueȱofȱtheȱ liability)ȱandȱ(b)ȱtheȱaforementionedȱoptionsȱ(whichȱreduceȱtheȱvalueȱofȱtheȱliability).ȱ

6.41ȱ Theȱfollowingȱpointsȱmayȱbeȱnotedȱinȱrelationȱtoȱthatȱrationale:ȱ

(a)ȱ TheȱdiscussionȱaboutȱliabilitiesȱinȱChapterȱ2ȱofȱtheȱdiscussionȱpaperȱisȱinȱtheȱcontextȱofȱ

determiningȱwhichȱcashȱoutflowsȱshouldȱbeȱreflectedȱinȱtheȱmeasurementȱofȱaȱpensionȱliability.ȱȱ Theȱviewȱthatȱemergesȱisȱthatȱtheȱeffectȱofȱdiscretionaryȱbehaviourȱwouldȱbeȱexcluded,ȱalongȱwithȱ possibleȱfutureȱchangesȱinȱbenefitsȱthatȱareȱnotȱpresentȱoptionsȱofȱtheȱemployer.ȱȱAlso,ȱifȱfutureȱ salaryȱlevelsȱwereȱnotȱreflectedȱinȱtheȱliability,ȱtheȱquestionȱofȱhowȱtoȱreflectȱtheȱemployer’sȱ discretionȱoverȱfutureȱincreasesȱinȱpensionableȱsalariesȱwouldȱnoȱlongerȱbeȱrelevant.ȱȱȱ

(b)ȱ Accruedȱbenefitsȱthatȱhaveȱbeenȱearnedȱbyȱemployeesȱcannotȱbeȱreducedȱbyȱtheȱemployerȱ(atȱleastȱ inȱtheȱpresentȱenvironmentȱinȱtheȱUKȱandȱmostȱotherȱcountriesȱthatȱweȱhaveȱcanvassed)ȱandȱ cannotȱbeȱavoidedȱbyȱclosingȱdownȱaȱplan.ȱ

(c)ȱ Forȱliabilitiesȱinȱrespectȱofȱbenefitsȱthatȱhaveȱnotȱvested,ȱassumptionsȱunderlyingȱtheȱestimatesȱofȱ cashȱflowsȱwouldȱalreadyȱreflectȱtheȱprobabilityȱthatȱvestingȱconditionsȱwillȱnotȱbeȱfulfilled.ȱȱȱȱ

Risksȱinȱpensionȱliabilitiesȱ

6.42ȱ Anȱimportantȱissueȱthatȱmightȱdivideȱtheȱtwoȱapproachesȱisȱwhetherȱtheȱmeasurementȱresultingȱ fromȱapplyingȱbuildingȱblocksȱ(a)ȱandȱ(b)ȱshouldȱbeȱadjustedȱforȱaȱriskȱmarginȱ(asȱinȱbuildingȱblockȱ(c))ȱ and,ȱifȱso,ȱhowȱshouldȱitȱbeȱmeasuredȱforȱaȱpensionȱliability.ȱ

6.43ȱ Asȱisȱdemonstratedȱinȱtheȱdiscussionȱbelow,ȱsolvingȱtheȱissueȱofȱaȱriskȱmarginȱisȱprovingȱelusive.ȱȱ Itȱhasȱbeenȱnotedȱthat,ȱinȱtheȱdebateȱaboutȱinsuranceȱliabilities,ȱsomeȱbelieveȱthatȱanȱ‘entryȱprice’ȱriskȱ marginȱshouldȱbeȱusedȱratherȱthanȱanȱestimateȱofȱtheȱmarginȱthatȱotherȱmarketȱparticipantsȱwouldȱrequireȱ forȱbearingȱrisk.ȱȱButȱifȱthatȱviewȱwereȱappliedȱtoȱpensionȱliabilities,ȱthereȱremainsȱaȱbigȱquestionȱ

regardingȱhowȱtoȱmeasureȱthatȱmarginȱbecauseȱ(unlikeȱinsuranceȱcontracts)ȱthereȱisȱusuallyȱnoȱobservableȱ entryȱorȱtransactionȱpriceȱforȱassumingȱtheȱliabilities.ȱȱ

6.44ȱ Itȱmightȱbeȱhelpfulȱtoȱconsiderȱaȱpensionȱliabilityȱasȱgivingȱriseȱtoȱtwoȱtypesȱofȱrisks:ȱ

1. Risk/variabilityȱofȱtheȱsizeȱofȱtheȱpensionȱclaim.ȱ

2. Riskȱthatȱthereȱisȱinsufficientȱcashflow/assetsȱinȱtheȱcompanyȱtoȱpayȱtheȱpensionsȱ(creditȱrisk).ȱ 6.45ȱ Theȱfirstȱisȱtheȱriskȱthatȱtheȱactualȱpensionȱpaymentsȱwillȱdifferȱfromȱtoday’sȱexpectations,ȱwhenȱ assumptionsȱhaveȱbeenȱmadeȱaboutȱtheȱuncertaintiesȱthatȱwillȱaffectȱtheȱamountȱofȱbenefitsȱtoȱbeȱpaid,ȱ suchȱasȱmortalityȱratesȱandȱ(forȱthoseȱwhoȱbelieveȱtheyȱshouldȱbeȱtakenȱintoȱaccount)ȱfutureȱsalaryȱlevels.ȱ 6.46ȱ Theȱsecond,ȱcreditȱrisk,ȱisȱdiscussedȱinȱSectionȱ7ȱwhereȱitȱisȱconcludedȱthatȱitȱisȱinappropriateȱforȱ anȱemployer’sȱliabilityȱforȱpensionsȱtoȱbeȱreducedȱtoȱreflectȱtheȱemployer’sȱownȱcreditȱrisk.ȱ

6.47ȱ Theȱapproachȱinȱtheȱinsuranceȱdiscussionȱpaperȱtoȱtheȱriskȱofȱtheȱsizeȱofȱtheȱclaimȱisȱsimilarȱtoȱ adjustingȱtheȱexpectedȱvalueȱofȱtheȱcashȱoutflowsȱtoȱaȱ‘certaintyȱequivalent’.ȱȱTheȱthinkingȱisȱthatȱaȱ liabilityȱwithȱanȱuncertainȱcashȱoutflowȱthatȱhasȱanȱexpectedȱvalueȱofȱ100ȱisȱusuallyȱmoreȱonerousȱthanȱaȱ liabilityȱwithȱaȱcertainȱcashȱoutflowȱofȱ100.ȱȱInȱotherȱwords,ȱanȱentityȱwouldȱwantȱtoȱbeȱcompensatedȱforȱ theȱuncertaintyȱandȱwouldȱthereforeȱdemandȱtoȱbeȱpaidȱmoreȱtoȱassumeȱtheȱuncertainȱliabilityȱthanȱtoȱ assumeȱtheȱcertainȱliabilityȱ(basedȱonȱtheȱassumptionȱthatȱinvestorsȱareȱriskȱaverse)ȱ

6.48ȱ SomeȱhaveȱsuggestedȱthatȱaȱriskȱpremiumȱshouldȱonlyȱincludeȱtheȱsystematicȱorȱnonȬdiversifiableȱ risks.ȱȱTheseȱareȱheldȱtoȱbeȱrisksȱthatȱcannotȱbeȱdiversifiedȱawayȱfromȱbyȱholdingȱaȱlargeȱportfolioȱofȱ pensionȱliabilitiesȱorȱsimilarȱassetsȱandȱincludeȱinȱparticularȱtheȱriskȱthatȱmortalityȱratesȱinȱtheȱfutureȱwillȱ beȱdifferentȱfromȱtoday’sȱestimatesȱandȱtheȱriskȱthatȱrealȱsalaryȱincreasesȱinȱtheȱfutureȱwillȱbeȱdifferentȱ fromȱtoday’sȱestimatesȱ(theȱlatterȱassumes,ȱofȱcourse,ȱthatȱfutureȱsalaryȱlevelsȱareȱreflectedȱinȱsomeȱ pensionȱliabilities,ȱwhichȱasȱdiscussedȱinȱChapterȱ2,ȱisȱaȱtreatmentȱthatȱmanyȱdoȱnotȱagreeȱwith).ȱȱTheȱ theoryȱisȱthatȱinȱefficientȱmarkets,ȱonlyȱnonȬdiversifiableȱriskȱwillȱbeȱpricedȱbecauseȱtheȱmarketȱwillȱnotȱ chargeȱforȱotherȱrisksȱthatȱitȱcanȱoffsetȱbyȱdiversification.ȱȱȱ

6.49ȱ Furthermore,ȱdifferentȱviewsȱareȱheldȱonȱwhetherȱtheȱvalueȱofȱaȱpensionȱliabilityȱisȱincreasedȱorȱ decreasedȱwithȱnonȬdiversifiableȱriskȱsuchȱasȱtheȱmortalityȱriskȱthatȱcannotȱbeȱhedged.ȱȱForȱexample,ȱsomeȱ claimȱthatȱaȱriskyȱliabilityȱcouldȱbeȱdischargedȱmoreȱefficientlyȱbyȱtheȱcashȱflowsȱarisingȱfromȱaȱportfolioȱ thatȱincludesȱsomeȱriskyȱassetsȱthanȱtheȱcashȱflowsȱfromȱaȱportfolioȱofȱriskȬfreeȱassetsȱ(becauseȱtheȱrisksȱ areȱoffsetting)ȱandȱthatȱtheȱliabilityȱshouldȱthereforeȱbeȱmeasuredȱwithȱreferenceȱtoȱtheȱvalueȱofȱtheȱmostȱ efficientȱportfolioȱofȱassets.ȱȱȱ

6.50ȱ Itȱmayȱbeȱnotedȱthatȱunderȱtheȱproposalsȱinȱtheȱinsuranceȱdiscussionȱpaper,ȱtheȱdirectionȱofȱanȱ adjustmentȱforȱriskȱofȱtheȱsizeȱofȱtheȱclaimȱisȱtoȱincreaseȱanȱinsuranceȱliability.ȱȱMostȱcontributorsȱtoȱthisȱ paperȱwouldȱagreeȱthatȱtheȱeffectȱofȱconveyingȱtoȱanȱemployerȱtheȱriskȱthatȱitȱwillȱhaveȱtoȱpayȱmoreȱ benefitsȱifȱpeopleȱliveȱlongerȱthanȱexpectedȱisȱtoȱmakeȱaȱpensionȱliabilityȱmoreȱonerousȱthanȱitȱwouldȱbeȱifȱ theȱriskȱwereȱborneȱbyȱothersȱ–ȱitȱhasȱbeenȱlikenedȱtoȱanȱemployerȱwritingȱaȱcallȱoptionȱthatȱcanȱbeȱ

exercisedȱbyȱpeopleȱlivingȱlonger.ȱȱȱ

6.51ȱ Aȱmatterȱonȱwhichȱallȱwouldȱagreeȱisȱthatȱaȱriskȱmarginȱforȱaȱpensionȱliabilityȱisȱveryȱdifficultȱtoȱ measure.ȱȱManyȱwouldȱgoȱfurther,ȱtakingȱtheȱviewȱthatȱsomeȱrisksȱ(forȱexample,ȱthoseȱrelatingȱtoȱfutureȱ changesȱinȱmortality)ȱareȱ‘unknowable’ȱandȱthereforeȱcannotȱbeȱquantified.ȱȱUnderȱthisȱview,ȱitȱwouldȱbeȱ misleadingȱtoȱtryȱandȱreflectȱtheȱfinancialȱeffectȱofȱsuchȱrisksȱinȱreportedȱliabilityȱamounts,ȱsay,ȱbyȱ

attemptingȱtoȱconstructȱaȱtheoreticalȱentryȱprice.ȱȱAccordingly,ȱunderȱthisȱview,ȱusersȱareȱbetterȱservedȱbyȱ disclosureȱaboutȱtheȱassumptionsȱthatȱhaveȱbeenȱusedȱinȱtheȱestimatesȱofȱtheȱcashȱflowsȱandȱtheȱ

sensitivityȱofȱtheȱliabilityȱtoȱchangesȱinȱthoseȱassumptionsȱ(seeȱChapterȱ9).ȱȱ

6.52ȱ Theȱfollowingȱtableȱexpandsȱthatȱinȱparagraphȱ6.27ȱtoȱreflectȱtheȱforegoingȱdiscussion,ȱaddingȱaȱ possibleȱbasisȱforȱmeasuringȱpensionȱliabilitiesȱunderȱanȱentityȬspecificȱviewȱofȱtheȱliability:ȱ

Insuranceȱliabilitiesȱ (IASBȱDP)ȱ

Pensionȱliabilitiesȱ(IASȱ 19)ȱ

Pensionȱliabilitiesȱ (entityȬspecificȱview)ȱ

Expectedȱvalueȱofȱcashȱ flowsȱ(marketȬconsistentȱ estimates)ȱ

Expectedȱvalueȱofȱcashȱ flowsȱ(entity’sȱbestȱ estimates)ȱ

Expectedȱvalueȱofȱcashȱ flowsȱ(entity’sȱbestȱ estimates)ȱ

DiscountȱatȱriskȬfreeȱrateȱ Discountȱatȱhighȱqualityȱ corporateȱbondȱrateȱ

DiscountȱatȱriskȬfreeȱrateȱ

Addȱaȱmarketȱmarginȱ Noȱmarginȱaddedȱ Noȱmarginȱaddedȱ Discloseȱsensitivitiesȱofȱ assumptionsȱ

6.53ȱ Theȱforegoingȱdiscussionȱmayȱbeȱsummarisedȱasȱfollows:ȱ

x Theȱobjectiveȱofȱaȱcurrentȱvalueȱmeasureȱofȱfutureȱpaymentsȱofȱpensionȱbenefitsȱisȱtoȱreflectȱ today’sȱvalueȱofȱtheȱfutureȱcashȱoutflowsȱexpectedȱtoȱsettleȱtheȱliabilityȱwhenȱitȱfallsȱdue.ȱȱThisȱ approachȱmightȱbeȱviewedȱasȱanȱ‘entityȬspecific’ȱmeasurement,ȱbecauseȱitȱaimsȱtoȱreflectȱnotȱ onlyȱtheȱpropertiesȱofȱtheȱliabilityȱitselfȱbutȱalsoȱtheȱrelationshipȱtoȱitsȱowner.ȱȱWhereȱthisȱ measureȱisȱderivedȱfromȱdiscountingȱfutureȱcashȱflowsȱitȱshouldȱreflect:ȱ

ƒ expectedȱvalueȱofȱcashȱflowsȱ(entity’sȱbestȱestimates)ȱthatȱwouldȱbeȱadmittedȱunderȱtheȱ proposalsȱinȱChapterȱ2ȱ

ƒ currentȱmarketȱdiscountȱrateȱtoȱreflectȱtheȱtimeȱvalueȱofȱmoneyȱonly,ȱi.e.ȱaȱriskȬfreeȱrate.ȱ

x Inȱtheoryȱtheȱliabilityȱshouldȱalsoȱreflectȱaȱmarginȱforȱrisk,ȱbutȱthereȱisȱconcernȱthatȱsomeȱrisksȱ (forȱexampleȱthoseȱrelatingȱtoȱfutureȱchangesȱinȱmortality)ȱareȱ‘unknowable’ȱandȱthereforeȱ cannotȱbeȱquantified.ȱȱAccordingly,ȱusersȱareȱbetterȱservedȱbyȱdisclosureȱaboutȱtheȱsensitivitiesȱ ofȱtheȱliabilityȱtoȱchangesȱinȱtheȱassumptionsȱthatȱhaveȱbeenȱusedȱinȱarrivingȱatȱtheȱbestȱ

estimates.ȱ

7 Credit risk of liabilities

No documento THE FINANCIAL REPORTING OF PENSIONS (páginas 117-129)