Big business defined-fund shortfall to crimp profits
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.
Frequently Asked Questions about this Article…
The new accounting rules change how companies treat defined-benefit (DB) staff super funds in their accounts, limiting the ability to use returns from pension assets to boost company earnings. They were introduced in response to overseas standards and are effective for annual reports beginning after January, making now a key time for companies to disclose any likely impact.
Because companies will have less choice about recognising returns from pension assets in their income statement, firms with large DB scheme assets may no longer be able to record strong investment gains as profit. That can raise their reported costs and crimp profits, particularly for older companies that still carry big DB obligations.
The article highlights several large companies with defined-benefit schemes that could be affected, including Commonwealth Bank, Telstra, Westpac, ANZ, NAB, Rio Tinto, Qantas, BlueScope and Coca‑Cola Amatil — especially those with schemes holding large assets.
Commonwealth Bank recently said the accounting change would increase its costs by $80 million this year.
Two main pressures are weak investment returns from fixed-income markets and falls in Commonwealth bond yields. Lower expected returns have increased deficits in many DB schemes, prompting regulators to pressure companies to inject extra money into the funds.
According to the Australian Bureau of Statistics figures cited in the article, unfunded super liabilities across all levels of government rose sharply to $238 billion at December, up from $148 billion six months earlier — largely because lower bond yields mean assets are expected to earn less than previously thought.
Lynda Tomkins, a partner at Ernst & Young, said that many companies will no longer be able to record strong returns from assets held to meet DB obligations in their income statement. For schemes with large assets and good returns, this change will probably increase the cost recognised in the company’s profit and loss.
Investors should look for disclosures in annual reports about any likely increase in costs from DB schemes now the rules are in force. Watch for statements about rising pension expenses, funding deficits, and whether companies — especially older firms with big DB liabilities — flag material hits to profit or plans to inject extra capital.
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