Discuss the disclosure of risks arising from defined benefit plans by Essay

Discuss the disclosure of risks arising from defined benefit plans by listed companies following IAS 19. Associated reading The - Essay Example The arguments made in this article form the basis of the recommendations that the authors have later made in their report for ICAS. 2) ICAS wants better disclosure of pension risk reporting, by Pat Sweet that appeared in September 2010 in Accountancy Magazine. 3) The FTSE 100 and their pension disclosures: Pension Capital Strategies quarterly report of February 2010. Discussion: The key risks associated with Defined Benefit Pension Schemes (DBPS) highlighted in the ICAS report are: the asset-price volatility caused by market driven factors, a mismatch in the duration of the assets relative to the liabilities and increase in the life expectancies of the individuals covered under these schemes. The increase in pension liabilities is directly proportional to the increase in life expectancies of those covered. There is also the risk to cash flows in cases where the company has to provide cash to fill or reduce the deficits in their DBPS. The report as part of its research surveyed the in formation relating to DBPS in the annual reports of FTSE 100 companies. The research survey covered all 88 companies, as on 31st December 1999, that had a Defined Benefits Pension Scheme for their employees. 80 of these companies had UK based DBPS schemes. The research of the report revealed that the total aggregate deficit faced by the DBPS schemed of FTSE 100 companies was GBP 53.5 billion. This deficit of GBP 53.5 billion was caused because the total liabilities of GBP 409 billion were backed by assets of only GBP 356.3 billion. There was widespread variation in the size of the schemes of the different companies and in the extent to which they were funded by the companies. Only ten companies disclosed the sensitivity of DBPS’ liabilities to all four actuarial assumptions. These four actuarial assumptions are: a) Future price inflation rates. b) Salary inflation. c) Mortality rates or life expectancy. d) The discount rate used to compute the present value of the liabilities . These actuarial assumptions have been recommended by the UK Accounting Standard Board’s suggested guidelines on best practices ( 2007 ). Thirty five companies disclosed no sensitivities to changes in actuarial assumptions. Disclosures of the companies increased with the size and strength of the schemes. The different industry sectors were compared and it was found that the banking sector had the highest level of risk disclosure of their DBPS. As far as assumption of future rates of price inflation were concerned, there were limited variations in the assumptions of the different companies. Salary growth assumptions ranged from 1.8% per year to 5.9% per year.There was significant variation in the time frame covered by the life expectancy forecasts of the different companies. These forecasts ranged from 5 years to 25 years in future. The recommendations of this report have caused some debate. One of those recommendations is that the companies should disclose the time estimatio n risks for those assets (in which the DBPS has invested) for which there are no quoted market prices. The second recommendation is that companies should do a sensitivity analysis of the pension liabilities vis-a-vis the four actuarial assumptions that have been mentioned above. The writers of the report justify this recommendation