In May, the ASB issued two exposure drafts for the price of one, containing proposals to improve the disclosures for defined benefit pension schemes. Project Director Michelle Crisp gives an outline.

The proposals comprise an amendment to Financial Reporting Statement (FRS) 17 - Retirement Benefits and a proposed new Reporting Statement Retirement Benefits - Disclosures.

Since FRS 17 became fully effective in January 2005 some commentators have expressed a concern that the existing disclosures set out in the standard do not provide sufficient information to allow users to assess the risks and rewards in defined benefit schemes. These comments, combined with changes in UK pension regulation that have occurred since FRS 17 was first published, prompted the ASB to undertake a shortterm review of the disclosures requirements set out in FRS 17.

The aim of the review is to see whether disclosures for defined benefit schemes can be improved in the short-term. This review is distinct from the wider research project for pension accounting announced by the ASB in October 2005 (see page 2 for a progress report).

The ASB asked its Pensions Advisory Panel and European pensions working group for their assistance with this short-term project. They provided the ASB with recommendations of areas where disclosures for defined benefit schemes could be improved.

Amendment to FRS 17 - Retirement Benefits

The ASB is proposing to replace the disclosure requirements set out in FRS 17 with those of International Accounting Standard (IAS) 19 Employee Benefits. This will achieve convergence with IAS 19 and address some of the concerns noted by commentators. In proposing to converge the disclosures requirements the ASB took into consideration that the International Accounting Standards Board (IASB) last reviewed IAS 19 in December 2004 following a review of national standards on accounting for post-employment benefits.

The significant additional disclosures required by the proposed amendment to IAS 19 include:

• the principal assumptions used as at the balance sheet date. FRS 17 currently requires information regarding the main financial assumptions. Where applicable this will require mortality rates to be disclosed;
• an analysis of opening and closing scheme liabilities and scheme assets showing separately, if applicable, the movements in scheme liabilities and scheme assets; and
• an analysis of scheme liabilities into amounts arising from schemes that are wholly unfunded and amounts arising from schemes that are wholly or partly funded.

Draft Reporting Statement

The ASB is also proposing a new Reporting Statement. The Reporting Statement aims to complement the disclosures proposed in the amendment to FRS 17 and to address concerns raised by commentators.

The draft Reporting Statement is designed as a formulation of best practice; it is intended to have persuasive rather than mandatory force. In proposing a voluntary Reporting Statement the ASB considered that the extent of the disclosures provided in financial statements would be assessed by the directors of the reporting entity. The extent of disclosure would depend on the significance of the entity's defined benefits schemes and its exposure to risks arising from those schemes. The draft Statement sets out six principles to be considered when providing disclosures for defined benefit schemes. The principles address the following areas:

• the relationship between the entity and trustees (managers) of defined benefit schemes;
• the principal assumptions used to measure scheme liabilities;
• the sensitivity of scheme liabilities to changes in the principal assumptions used to measure scheme liabilities;
• how the liabilities arising from a defined benefit scheme are measured;
• future funding requirements of defined benefit schemes; and
• the nature and extent of risks arising from the assets held by the defined benefit scheme.

Invitation to Comment

In its Invitation to Comment the ASB notes that in setting out its proposals it took into consideration the new statutory regime in the UK. In connection with this it considered whether the Pension Protection Fund Levy introduced to fund compensation payable to members of eligible defined benefit schemes in the event of a qualifying insolvency event should be disclosed. In addition the ASB considered whether disclosure should be made of the amount of compensation that the Pension Protection Fund would be required to pay in the event of the sponsoring employer becoming insolvent. The ASB decided not to propose disclosure of these two amounts but would welcome comments on its proposals.

The ASB is also inviting comments on its proposal to disclose the buy-out cost at the balance sheet date with a suitable insurance company. The ASB notes in its invitation to comment that it has considered a number of alternative points of view on the potential benefits of this disclosure and invites the views of constituents before finalising the draft Reporting Statement.

The ASB has requested comments on its proposals by 11 September 2006.