Human Resources: Employers Oppose Proposed New Pension Accounting Rules

WASHINGTON, D.C., September 4, 2008 — Employers believe changes to current
pension accounting standards are necessary, but most are not in favor of
the changes proposed in the International Accounting Standards Board’s
(IASB’s) preliminary views paper, according to a recent survey by Watson
Wyatt Worldwide, a leading global consulting firm. With last week’s
Securities and Exchange Commission’s (SEC’s) vote to move the United States
toward international accounting rules, the proposed changes could have a
significant impact on U.S. employers’ financial statements.

In the survey of 131 finance and employee benefit directors across 17
countries, most respondents said change is needed in several key areas of
pension accounting. Improvements to requirements for the measurement of
cash balance and similar pension plans are viewed as most necessary, with
eight in 10 employers desiring change in this area.

A narrower majority (56 percent) agrees with the IASB that pension
accounting should change by removing options to defer the recognition of
plan gains and losses. Eighty percent of respondents, however, do not
support the IASB’s suggestion to recognize all plan experience immediately
in the profit and loss (P&L) account, one of three options the IASB is
considering in this area.

“The IASB’s proposal would make substantial changes to the way retirement
benefits are accounted for under International Financial Reporting
Standards,” said Alan Glickstein, a senior retirement consultant at Watson
Wyatt. “With the United States likely to adopt international standards, all
U.S. companies would be well served to familiarize themselves with the
proposals and assess the potential impact of the changes on their existing
plans.”

Currently, there is low awareness of the IASB proposal among U.S.
employers, with 34 percent identifying themselves as not at all familiar
with the preliminary views paper. Across all regions, many companies
familiar with the proposed changes to IAS19 – the International Accounting
Standard for employee benefits – have yet to take action. As of early July,
only 12 percent had analyzed or quantified the potential ramifications of
the proposal on their plans. Forty-six percent, however, planned to learn
more about the proposal and 51 percent planned to analyze its possible
effects by September 26, 2008, the end of the IASB comment period.

While the changes would not reduce most employers’ commitment to offering
pension plans, sizeable minorities said the proposed changes to cost
recognition (46 percent) and to the measurement of contribution-based plans
(24 percent) would discourage them from offering defined benefit (DB) plans
in the future.

“If implemented, the proposed changes could mean higher assessments of
liabilities and increased volatility in employer financial statements,”
said John Steele, a senior retirement consultant at Watson Wyatt. “The more
companies engage the IASB in a dialogue, the better. Providing early
feedback could help influence the development of standards that might be
adopted down the road.”

Other Findings

Other proposed changes that are unpopular among employers include:
Introducing the contribution-based promise, a new classification of benefit
that would include cash balance, career average, notional defined
contribution and flat dollar/multiplier plans. It would use a different
measurement approach than final average pay and retiree medical plans, a
change 50 percent of respondents find inappropriate and 38 percent support.
Requirement the measurement of pension obligations to reflect credit risk,
which 54 percent of employers find inappropriate and 29 percent support.
Introducing different accounting treatment for in-payment annuities based
on how they were defined as they were accumulating, a change 53 percent of
respondents find inappropriate and only 24 percent support.

Employers have different priorities than the IASB: Employers believe
improvements to requirements for the measurement of cash balance and
similar pension plans are most necessary. The IASB has indicated that it
might make this area a lower priority going forward and instead focus on
changes to cost recognition, which are viewed as less necessary and less
appropriate among employers. Additionally, 58 percent of respondents
believe requirements for the measurement of final salary and retiree
medical plans should be improved – an area not addressed in the IASB’s
discussion paper.
Copies of the survey report, Accounting for Employee Benefits: Reactions to
the IASB’s Preliminary Views Paper From Around the World, are available at
http://www.watsonwyatt.com/accountingreform. For more information on the
IASB’s proposal, Preliminary Views on Amendments to IAS19 Employee
Benefits, visit
http://www.watsonwyatt.com/news/globalnews2.asp?ID=18901&nm=Global.

About Watson Wyatt
Watson Wyatt (NYSE, NASDAQ: WW) is the trusted business partner to the
world’s leading organizations on people and financial issues. The firm’s
global services include: managing the cost and effectiveness of employee
benefit programs; developing attraction, retention and reward strategies;
advising pension plan sponsors and other institutions on optimal investment
strategies; providing strategic and financial advice to insurance and
financial services companies; and delivering related technology,
outsourcing and data services. Watson Wyatt has 7,000 associates in 32
countries and is located on the Web at www.watsonwyatt.com.