Added value of implementing risk sharing thanks to its positive impact on IFRS key figures
The use of risk-sharing assumptions for the measurement of pension obligations in the IFRS financial statements allows the regulatory requirements of Swiss pension plans to be reflected more realistically with regard to the employer’s share of the total funding of a pension plan and thus to implement potential benefit adjustments and underfunding measures.
IFRS pension obligations are to be measured at the market-based discount rate, therefore in recent years IFRS pension costs have become much higher and more volatile in the current low interest rate environment, which can lead to a significant under-recovery in the IFRS financial statements. Traditionally, all related costs were recorded at the employer’s expense. As a result, various de-risking strategies have been implemented by boards of trustees and companies to stabilize the funding of pension benefits and reduce IFRS liabilities. Such strategies lead to benefit reductions and employees are mainly affected by this.
In December 2016, the Commission for True and Fair View Accounting of Expertsuisse communicated “that the obligation existing between employers and employees to jointly fund pension obligations is to be taken into account under certain circumstances in the sense of risk sharing when measuring pension obligations according to IAS 19.
The objective of this paper is to show the impact of the implementation of the risk sharing models 1.0, 2.1 and 2.2 on the IFRS financial statements, illustrated for two sample funds, PF 1 and PF 2, which represent typical Swiss pension funds.
Chapter 2 provides an insight into the risk sharing (RS) of the IFRS standards. The results for the sample funds are presented in chapter 3.