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Accounting Standards Board

30 Cannon Street

London EC4M 6XH

United Kingdom 

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PO Box 90801

2509 LV The Hague

The Netherlands

Anna van Hannoverstraat 4

The Hague

Telephone +31 70 333 44 44

Telefax +31 70 333 40 33

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  DOCPROPERTY  kDatum  \* MERGEFORMAT  Date 	6 oktober 2008  DOCPROPERTY
 iDatum  \@ "d MMMM yyyy"  

 





Dear members of the International Accounting Standards Board,

I would like to take the opportunity to comment on your discussion paper
‘Preliminary Views on Amendments to IAS 19 Employee Benefits’ (the
reporting rules applicable to listed companies’ pension plans). 

It has become apparent that reporting rules can have far-reaching
consequences for pension schemes. The proposals in your discussion paper
have consequently attracted considerable attention from civil society
and professional organisations as well as in the Dutch Parliament. In
preparing this response, I consulted representatives of the Dutch
Accounting Standards Board, accounting firms, employers’ and
employees’ organisations, pension fund bodies and supervisory bodies.
They agree with the conclusion that your proposals concerning the
contribution-based promise and the ‘corridor’ method are major
changes that should not be made before a fundamental review of
accounting for pensions has been conducted. 

The Dutch Accounting Standards Board has given an extensive response to
your discussion paper, to which I would refer you for more detailed
comments and for the answers to your questions. I would like in this
letter to elucidate a number of key points.

‘Hybrid’ pension systems and the current reporting rules

One of the aims underlying your discussion paper is to introduce
improvements to the application of IAS 19 in the near future. The need
for such improvements is keenly felt in the Netherlands as the
application of IAS 19 is perceived as being restrictive. The strict
distinction in IAS 19 between rules for ‘defined benefit plans’
(under which the pension obligations and the associated assets are fully
attributed to the employer) and rules for ‘defined contribution
plans’ (under which the employer’s pension obligation is limited to
payment of the employer’s contribution) does not allow for the
possibility that the obligations of a ‘defined benefit plan’ are not
– or not fully – borne by the employer, for instance if obligations
are borne by a legally independent pension fund with its own buffers. 

In case of a pension fund administering the pension scheme of an
employer, the prudential rules in Directive 2003/41/EC apply. This
Directive establishes minimum requirements with regard to the own funds
and obliges pension funds to draw up annual accounts. Member States can
set stricter requirements in this regard. The basic principle of these
prudential rules is that a pension fund should fulfil its commitments. 

The current reporting rules in IAS 19 do not take these prudential rules
into account. Reporting rules force the employer to recognise the same
obligations in its annual accounts. As a result two entities, the
company and the pension fund, recognise the same obligations in their
annual accounts. This is not transparent and does not reflect the
economic reality of the situation. 

Additionally, the strict distinction in IAS 19 between ‘defined
benefit’ and ‘defined contribution’ does not allow for the more
‘hybrid’ pension schemes in which the risks are largely borne by
members and beneficiaries. The current reporting rules in IAS 19
erroneously hold the employer accountable for those risks. In the
Netherlands most pension schemes are average salary pension schemes with
conditional indexation. The conditional nature of the indexation implies
that participants carry a large portion of the risk as to whether or not
indexation will take place. As a rule, a decision on whether or not
indexation will be applied must be taken every year by the board of the
pension fund. In this connection I would refer to the Dutch Accounting
Standards Board’s comments in its response to your discussion paper
and to the description of the ‘variable benefit plan’ in the annexe
to that response. Finally, the Dutch Pensions Act offers the opportunity
to reduce the accrued rights of members and beneficiaries (including
early leavers). This leaves the ultimate risk with members and
beneficiaries. Whether the employer can still be required in specific
situations to provide additional funding depends on the arrangements
made ex ante between employer and pension fund.

 

In their annual accounts companies clearly have to recognise commitments
to which they can be held, including promises to make additional
payments in the event of insufficient coverage. However, a true and fair
view is not presented, to my mind, if a reporting standard compels
employers to carry liabilities in their balance sheet in excess of those
to which they can be held either on the basis of a legal obligation or a
contract with the pension provider. In that case the rules compel
entrepreneurs to refrain from accepting any kind of risk. This is at
odds with the objectives agreed at the Laeken European Council in
December 2001 on solidarity within and between generations, aimed at
ensuring adequate and financially sound old age pensions in the light of
demographic ageing and a shrinking labour force.

The meaning of the proposals in the IASB discussion paper

Although the proposal in your discussion paper introducing the concept
of a ‘contribution-based promise’ to replace the definitions of
‘post-employment plans’ and ‘defined contributions plans’ makes
the distinction between the rules on defined benefit plans and on
defined contribution plans less clear-cut, it does not solve the
problems concerning hybrid schemes. I endorse the view expressed by the
Dutch Accounting Standards Board that the proposed changes to the
definitions are difficult to understand and may have far-reaching
implications for pension plans. Nor is it clear how obligations would be
measured.

 

I also agree with the Dutch Accounting Standards Board with regard to
the proposal to amend the ‘corridor’. The reasons put forward at the
time for introducing the corridor method are still valid today, and such
an amendment must be preceded by a fundamental review. 

Proposals for alternative solutions 

It is my belief that reporting rules must enable a true and fair view of
the economic reality of a company. This means that the presentation of
pension schemes in the annual accounts must reflect a company’s true
liabilities. Under the present rules it is not possible, as argued
above, to achieve this properly, and your proposals do not offer a
remedy to the problem.

Therefore, I propose that these aspects be examined as part of a
fundamental review of IAS 19. In the meantime, I believe the current IAS
19 rules should be maintained. I am willing to work constructively
towards a solution, in particular involving more ‘principle-based’
formulations which are also in line with other initiatives in this area,
and whereby input can also be provided by the Dutch Accounting Standards
Board.  

One possible approach would be to recognise, besides the employer’s
contribution, only a company’s contractual obligations and firm
commitments to the pension fund. In addition, the funding arrangements
between the employer and the fund would be addressed in the explanatory
notes. Information would also be included on the fund’s financial
position and the relationship between this financial position and the
future level of contributions. Any deficits in the fund and, where
relevant, recovery plans to be carried out by the fund would be properly
explained in the notes.  In this way the user would be given sufficient
useful information to assess the company’s liabilities.

A solution should also be sought for the related problem of applying IAS
19 to listed companies which participate in an industry-wide pension
fund. With industry-wide pension funds, the residual risk in
‘hybrid’ pension schemes is often even more limited for the
participating companies than in the case of pension funds linked to a
company. 

I would be pleased to offer my support to a fundamental review of IAS 19
and to explain my position in further detail.

Minister of Social Affairs

and Employment,

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 Official Journal L 235 of 23.9.2003, page 10

 In the Netherlands where an employer is obliged to have a pension fund
or an insurance company implement its pension plan, a pension fund is
obliged to maintain high buffers for the investment risks; approx. 30%
depending on the investment risk. Those buffers are such that the
accrued obligations are guaranteed with a 97.5% certainty level. In
addition, the employer has to pay a cost-effective contribution in which
there is a surcharge for the required buffer.

  DOCPROPERTY  kOnsKenmerk  \* MERGEFORMAT  Our reference 	  DOCPROPERTY
 iOnskenmerk  \* MERGEFORMAT  AV/PB/08/27044 



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