Valuation of Defined Benefit Pension Schemes in IAS 19 Employee Benefits – True and Fair?

Purpose - This paper argues that the accounting standards’ requirement for pension scheme liabilities to be discounted by reference to market yields at the end of the reporting period on high quality corporate bonds, potentially produces an artificial result which is at odds with the “fair representation” objective of these standards. Design/methodology/approach –The approach is a theoretical analysis of the relevant reporting standards with the use of a theoretical example to demonstrate the impact where trustees adopt a hedged approach to portfolio investment. Findings - Where the fund has adopted a hedging strategy and has invested in “risk – free” assets, the term, quantity and duration/maturity of which, is intended to match the term quantity and maturity of the scheme liabilities, applying the requirements potentially results in the reporting in sponsoring company financial statements of fluctuating surpluses or deficits each year which are potentially ill-informed and misleading. Originality/value – Pension scheme surpluses or deficits reported in the financial statements of listed companies are potentially very significant numbers, however the dangers posed by theoretical nature of the calculation has largely gone unreported.