Big business defined fund shortfall to crimp profits

Some of Australia's biggest companies face multimillion-dollar increases in the cost of their defined-benefit staff super funds as new accounting rules take effect.

Under standards being introduced this year, companies have less choice in how they treat defined benefit funds - which can hold billions in assets - in their accounts.

The changes, designed to make defined-benefit plans more transparent, relate to whether returns from pension assets can be used to bolster earnings in the company's income statement, as has frequently occurred until recently.

Experts say the new rules are likely to crimp profits from some big schemes, at a time when defined benefit schemes are also being crunched by weak returns from fixed-income markets.

Commonwealth Bank recently said the change would increase its costs by $80 million this year, and accounting experts say other older companies may also face big rises due to the change.

Other big companies with defined benefit schemes include Telstra, Westpac, ANZ, NAB, Rio Tinto, Qantas, BlueScope and Coca-Cola Amatil.

Lynda Tomkins, partner at Ernst & Young, said for many companies the changes would mean they could no longer record strong returns from assets held to meet their defined benefit obligations through the company's income statement.

For companies with schemes holding large assets, this would have the effect of raising their costs.

"If they've got large assets which are getting lots of good returns, this will probably put a higher cost on them, which they'll recognise in the P&L [profit and loss]," Ms Tomkins said.

While most companies have phased out defined benefit superannuation schemes, older companies still carry obligations that can be worth billions of dollars.

Weak investment returns have increased the deficit in many such schemes, prompting regulators to put growing pressure on companies to pour extra money into the funds.

In the public sector, unfunded pension liabilities from state and federal governments have increased sharply in recent years because of the fall in Commonwealth bond yields, which means assets in the schemes are expected to earn less than previously thought.

The unfunded super liabilities of all levels of government had blown out to $238 billion at December, compared with $148 billion six months earlier, figures from the Australian Bureau of Statistics show.

The changes were introduced in Australia in response to rules overseas, and are effective for annual reports beginning after January, making now a key time for companies to disclose any likely increase.