Accounting Changes Could Increase Profits for Risk-aware FTSE 100s
Research by PensionsFirst highlights that as many as 10% of the FTSE 100 may benefit from changes by the International Accounting Standards Board (IASB) to the IAS19 standard. It has been widely reported that the key changes – which include removing the current expected return on scheme assets income statement credit and replacing it with interest on the scheme assets at the AA-rated discount rate – would reduce company profits significantly once implemented.
However, this may not necessarily be the case and will depend on the types of assets that schemes are invested in. For those schemes with lower risk investment portfolios, it is quite possible that the returns expected on their scheme assets are below the yield on an AA-rated corporate bond. In these cases – which account for around 10% of the FTSE 100 – the income statement charge for pensions will become lower once the accounting changes are applied, resulting in increased profits.
“Some schemes are now in a position where they have de-risked their assets to more closely match their liabilities,” said Matthew Furniss, an assistant vice president (AVP) at PensionsFirst. “As a result of being invested predominantly in lower risk assets such as gilts – which may not be expected to yield the same levels as highly rated corporate bonds – such companies will therefore experience increased profits as a result of the accounting changes. This can only incentivise more de-risking within the pensions industry.”