kpmg-pensions accounting survey

8/3/2019 Kpmg-pensions Accounting Survey

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KPMG PensionsAccounting

Survey in the

Netherlands2011 Year-End preview and

2010 Year-End retrospective

kpmg.nl


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2011 KPMG Accountants N.V. All rights reserved.2 | KPMG Pensions Accounting Survey in the Netherlands


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2011 Year-End preview and 2010 Year-End retrospective | 3 2011 KPMG Accountants N.V. All rights reserved.

IntroductionUnder accounting standards such as IFRS, companies are required

to report pension liabilities and pension cost in respect of their

dened benet plans in accordance with a very prescriptive set

of rules. International Accounting Standard no. 19 (IAS 19),

paragraphs 72-91, sets out the requirements with regard tothe actuarial assumptions that should be used for calculating

the pension liabilities and pension cost.

The choice of pension assumptions facing company directors

is not straightforward and there is a wide spread of potential

alternatives.

An important development regardingIAS 19 is the publication of the amended

IAS 19 guidelines in June 2011.

The amendments will have effect onannual reports starting 1 January 2013.

The most important changes in

accounting policy and the expected

impact on the pension liabilities and

pension cost are discussed in this

survey.

The KPMG Pensions Accounting Survey

looks at the trends and assumptionsused in pension accounting in the

Netherlands, of companies reportingunder IFRS at 31 December 2010.

The assumptions are based on publicly

available information of companies

quoted on the Euronext Amsterdam

stock exchange. This survey covers

companies advised by all the major

actuarial consultancies and therefore

provides some insight into marketpractice in the Netherlands.


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4 | KPMG Pensions Accounting Survey in the Netherlands 2011 KPMG Accountants N.V. All rights reserved.

HeadlinesKey headlines of this survey are:

Changes in accounting guidelinescan have signicant impact on the

balance sheet position and the

pension cost. These changes willbecome apparent in 2013.

There are many different methodo-

logies to determine the discount rate.

Most companies are assisted by

actuarial advisors to determine their

discount rate. Generally, a yield curveis tted based on an (adjusted)

Bloomberg or (adjusted) iBoxx AA

corporate bonds universe. This leads

to a range of discount rates used

between 3.6% and 5.7%, wheremost companies use a discount

rate between 4.7% and 5.2% as

at 31 December 2010.

The implied ination rates seem toconverge to 2% which is the long

term expected ination rate used

by the European Central bank.

The assumption for pension increases

falls behind by the actual inationas the current nancial situation of

many plans will not allow for full

compensation of ination.

Assumed life expectancies continueto rise. Companies are increasingly

using generational mortality tables.

New generational mortality tables

have recently been issued by the

Dutch Actuarial Association, however

recent research by the Dutch Central

Bureau of Statistics (CBS) showsstronger improvement in the longevity

trend than assumed in the AG 2010-

2060 mortality tables. This can have

a further impact on the liabilities of0% to 5%, depending on the currently

used mortality tables and trends.


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Pension accounting changesIn June 2011, the International Accounting Standards Board (IASB)

published the amended IAS 19 guideline, with mandatory adoption

for years starting on or after 1 January 2013. The main changes are

the following;

The corridor methodology will no

longer be allowed to improve clarity

of the balance sheet position.

This means that actuarial gains/losses

have to be recognized in the period

that they occur. This is consistent

with a market value approach for the

liabilities.This will improve insight in the actual

liabilities of the company, but will

also result in volatile liabilities and

movements as a result of changesin assumptions and differences

between assumptions and reality.

The expected return on assets item

in the pension cost will be changed.

Currently it is recorded in companies

prots based on the asset mix and abuilding block approach. The current

form of an expected return on assets

credit will be replaced by an interest

item based on AA corporate bond

yields equal to the discount rate

used to determine the value of theobligations.

Whilst the move will improve trans-

parency, companies will lose the ability

to smooth earnings through settingtheir expected return assumptions,

especially in relation to the abolish-

ment of the corridor methodology,

causing the pension cost to become

more volatile. This in turn may force

some rethinking on the investmentstrategy.

The disclosure requirements are

improved to better reect the

characteristics of the dened benet

plans and give insight into the risks

arising from these plans.

Using the discount rate instead of the

expected return on assets assumption

will impact many companies. The pensioncost, recorded in P&L, will increase by

0% to 20% as a result of this change in

accounting policy. This effect will be offset

by the direct recognition of gains/losses

on assets. However, this will be reected

in other comprehensive income (OCI)

instead of P&L.

In addition to the technical changes,

disclosure requirements are alsoimproved. This will lead to a situation

where companies can actually be

compared. Currently every company

has their own disclosure format. There-

fore, beside the required numbers, the

information made available varies widely.

The impact of these

changes can be predicted

using the gures from

31 December 2010.

Many companies are

currently using the

corridor methodology and

immediate recognition ofall actuarial gains/losses

will lead to a total

increase of 14 billion in

pension liabilities of the

researched companies.

Individual impact on the

balance sheet position

ranges from a 1.7 billiondecrease to a 5.9 billion

increase of the pension

liabilities.


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Discount rateAccording to IAS 19 (paragraph 78), the rate used to discount

estimated cash ows should be determined by reference to market

yields at the balance sheet date on high quality corporate bonds.

It is market practice to use corporate bonds with an AA rating (or

equivalent) for this purpose.

setting and actuarial advisors are increa-

singly responding to this by using more

sophisticated methods for determining

the discount rate. One of the differences

that we see is that the bond yield

universe differs from company tocompany. This can lead to differences in

the basis which is illustrated in the chart

below, which compares 15-year spot

rates derived from Bloomberg (EURComposite AA BFV Curve, ticker F667)

and iBoxx (EUR Corporates AA) data, two

widely used indices for this purpose.

These rates show the same uctuations,

but are not at the same level, this also

holds for other maturities.

In addition to using different bond

universes, various methodologies are

used to determine a yield curve.

Based on the data points a yield curve

has to be t through these points to

contstruct a yield curve which can be

used to determine the discount rate.

This can be done using several methods,

some of which are:

Using an existing curve, such as the

Bloomberg (EUR) Composite AA BFV

curve, and interpolate betweenknown datapoints where required.

A zero-coupon curve can easily be

derived from such a (par) yield curve.

Constructing a number of datapoints

where the yields are calculated as

(weighted) averages wihtin a maturity

range or basket. The yield curve is

obtained by interpolation betweenthe datapoints and a zero coupon

curve can be obtained (under the

assumption that the yield curve

reects par yields).

Alternatively, a yield curve can betted through the bond universe, so

that the total of differences between

the curve and the actual bond prices

is minimised. This method assumes

that the yield curve can be describedby some (mathematical) function of

which the parameters need to be

estimated. Literature on yield curves

provides several methods that can be

used for this purpose.

Development of AA corporate

bond yields

We see that the discount rates have

gradually dropped until August 2010,

at which time the market value of the

liabilities was at its peak. From that

moment onward we have seen an

increase in rates until March 2011 and

a slight decrease in the last fewmonths. We see that both iBoxx and

Bloomberg curves have slightly risen

since 31 December 2010 with respec-

tively, 13 and 17 basis points. The currentturmoil in the nancial markets can

have an impact on the discount rate

movements in the coming months.

In the past years, companies have started

to pay more attention to assumption

Bloomberg

iBoxx

Bloomberg and iBoxx

(maturity 15 years)

7%

6%

5%

4%

3%

Rate

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11


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7%

6%

5%

4%

3%

2%

1%

0%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Spot curves actuarial firms

Spotrate

Maturity

Discount rate

18%

16%

14%

12%

10%

8%

6%

4%

2%

0%

5,5

%

Percentageofc

ompanies

9%

3%

5%

17%

5%

3%

8% 8% 8%8%

14%

12%

2%

For longer maturities, market informa-

tion is normally limited. If discount

rates are required for longer maturitiesthe yield curve can be extrapolated,

which is in most cases done by:

Keeping the spot rate constant aftera certain maturity, or

Keeping the credit spread (on a risk

free curve) constant after a certain

maturity.

In other commonly used methods in

nance, the longer end of the curve is

based on a (constant) ultimate forward

rate.

Making choices in developing a yield

curve can lead to signicant differences

in the resulting yield curve, as can beseen from the chart below. This chart

reects the methodologies used by

different actuarial advisors;

Discount rates used

at the 2010 Year-End

Most companies in the Netherlands set

their discount rate assumptions based

on one of the previously mentionedmethods compiled by their actuarial

advisors.

The median discount rates adopted by

companies at 31 December 2010 is

5.1% and most companies have used a

discount rate between 4.7% and 5.2%,which is generally consistent with spot

rates for maturities between 15 and

20 years given by most of the yield curves

shown.


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InationDevelopment of the ination rate

The graph below shows the Euro swapimplied ination curve, which essentially

reects how ination is priced by the

market. The graph shows that, comparedto 31 December 2009, 31 December 2010

long-term ination rate is initially at a

higher rate as a result of the current

ination rates. Another observation is

that the implied ination has decreased

by around 0.5% point, from 2.5% to

2.0%. The short- and mid-term swapination curve has signicantly attened

and implied ination varies between

1.7% and 2.3%. The curve also shows

that the market implied ination rate is

broadly in line with the ECB long-termview.

Ination rates used

at the 2010 Year-End

The majority of companies are assuming

a long-term ination rate of 2.0%. This is

consistent with the ECBs objective tokeep ination below, but close to, 2%.

Dutch pension plans generally try to

increase pensions in line with price

ination, however, as pension increasesare almost invariably conditional upon

investment returns, increases tend to be

lower in current times. Many companies

reect this is in their assumptions for

the long-term rate of pension increases.

As a result the rate of expected pension

increases is generally below the inationrate of 2.0%.

Inflation EUSWI

31/12/200931/12/2008 31/12/2010

3%

2,5%

2%

1,5%

1%

0,5%

0%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Maturity


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Expected return on assetsExpected return on plan assets varies signicantly between

companies for a variety of reasons. The rate of expected return

of the companies observed ranges between approximately

3.5% and 6.5%.

The differences are of course largely

caused by variety in plan asset allocation,

but differences in market views on

investment returns are an important

factor as well. The median expected

return on assets assumed is 5.1%.

With the abolishment of the possibility

of crediting the expected return to the

P&L (see Pension accounting change

section), companies will be less able

to manage the P&L pension charge.

However, it could be argued that a

rate of return on plan assets cannot

be reasonably estimated and shouldtherefore not be used for accounting

purposes.

9%

12%

14%

22%

25%

3%

5%

Expected return on assets

30%

25%

20%

15%

10%

5%

0%

6,5

%

Percentageofcompanies


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Life ExpectancyHistorically, most pension funds use mortality tables issued

by the Dutch Actuarial Association (Actuarieel Genootschap,

hereafter: AG). In August 2010 the AG issued new mortality

tables allowing for a signicant longevity improvement which

has been observed since 2001.

In the meantime the Dutch Central

Bureau of Statistics (CBS) published

mortality rates and research notes

(Bevolkingsprognose 20102060:

sterkere vergrijzing, langere levensduur,

March 2011) which show an evenstronger trend. This trend can be seen

in the graph below, for reference we

have included historical information on

expected future lifetime. Most companieshave used the AG 2010-2060 mortality

table in the IAS 19 gures, some with

longevity trends. Whether this sufciently

incorporates further improvements of

longevity is open to debate.

For the coming years we foresee

that many companies will adopt the

observable trends which will generally

result in further increases in liabilities

ranging from 0% to 5%, depending onthe mortality tables currently used.

Expected future lifetime from age 65 (CBS)

24

22

20

18

16

14

12

1950

1956

1962

1968

1974

1980

1986

1992

1998

2004

2010

2016

2022

2028

2034

2040

2046

2052

2058

Men (65) 2008-2050

Women (65) 2008-2050

Men (65) 2010-2060

Women (65) 2010-2060


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KPMG Netherlands offers services in

the elds of audit, tax and advisory.

We offer our services to a broad group ofclients: major domestic and international

companies, medium-sized enterprises,

non-prot organisations and governmentinstitutions. The complicated problems

faced by our clients require a multi-

disciplinary approach. Our professionals

stand out in their own specialist elds

while, at the same time, working together

to offer added value that enables our

clients to excel in their own environment.In doing so, we draw from a rich source

of knowledge and experience, gained

worldwide in the widest range of different

organisations and markets. We provide

real answers so that our clients can makebetter decisions.

Risk & Actuarial Services (RAS)

Risk & Actuarial Services offers creative

business strategies to clients in the

rapidly changing insurance and pensions

industry. We also bring insight andquantitative analytic skills to other clients

assisting them with the challenges they

are facing. We support numerous pension

funds and companies with advice on

pension plan design, pension valuationsand risk analysis. Our team of (qualied)

actuaries works together with other

KPMG professionals to form multi-

disciplinary teams and guarantee the

best service for our clients.

About KPMG Netherlands


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The information contained herein is of a general nature and is not intended to address the circumstances of any particularindividual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such

information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on

such information without appropriate professional advice after a thorough examination of the particular situation.

2011 KPMG Advisory N.V., a Dutch public limited liability company under Dutch law, is a subsidiary of KPMG Europe LLP

and a member rm of the KPMG-network of independent member rms afliated with KPMG International Cooperative

(KPMG International), a Swiss entity. All rights reserved. Printed in the Netherlands. The KPMG name, logo and cutting

through complexity are registered t rademarks of KPMG International Cooperative. 120_0711

Contact us

Edward Snieder

T: +31 (0)20 656 7941

E: [email protected]

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T: +31 (0)20 656 4673


Marc Simon Visser

T: +31 (0)20 656 7055


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