Public pension accounts move towards market-consistency

The future international public sector accounting standard (IPSAS) relating to employee benefits is likely to stipulate entities use market yields of high quality corporate bonds to determine the risk-free discount rate to discount pension benefits. The IPSAS board will discuss the matter at its meeting in Montreal next week and is likely to adopt such a ruling then, according to Mike Hathorn, London-based chairman of the IPSAS board.

With cash flow accounting or actuarial discounting of pension liabilities currently being used at many public sector entities across the world, the change could give a far less rosy picture of finances than is apparent today. When New York City's chief actuary produced a market-consistent valuation of the city's pension liabilities, the result was an unofficial deficit of $49 billion (Life & Pensions, March 2006, p26).

"The majority (of respondents to the relevant exposure draft for the new standard) favoured a discount rate primarily based on corporate bonds, mainly because they can't see that there's an adequate public-sector specific reason to depart from IAS19 (the international accounting standard concerning employee benefits)," said Hathorn. The IPSASs are modelled closely on the international financial reporting standards (IFRS, formerly international accounting standards or IAS) for the corporate sector - with a view to the overall goal of achieving the highest possible degree of harmonisation with respect to financial reports. "Certainly, the international organisations (OECD, NATO, UN, etc.) feel more comfortable with the IAS19 basis rather than something with a more government-based focus. So without pre-empting the board's decision next week, I suspect that this is a point that we will accept," he added.

The relevant draft standard - exposure draft 31 - contains the option for modelling the discount rate on market yields of government bonds or of high-quality corporate bonds in markets where government bonds are not the optimal risk-free benchmark - matching the pension obligation in currency and term. However, following the feedback to the exposure draft, the IPSAS board is likely to opt for stipulating the use of high-quality corporate bond market yields as the benchmark, except in those countries where no deep market for such bonds exists. In the latter case, government bond yields would be used to calculate the rate at which pension benefits are to be discounted.

Hathorn stressed that the IPSAS board was keen to issue its accounting standard for employee benefits as soon as possible. "The board has been concerned that we had not got a public-sector standard for IAS19," he said. However, given that the exposure draft 31 does not explicitly contain the option of using primarily corporate bond market yields in calculating the discount rate, the revised document may have to be re-exposed for comment, Hathorn observed. A decision will be taken at next week's board meeting. He added that he expected a final decision on the future IPSAS 31 at the IPSAS board's November meeting at the latest. The new standard would then be adopted in the first quarter of 2008.

So far, IPSAS has been implemented primarily by international bodies, including the OECD, NATO, the European Commission and the IFAC (International Federation of Accountants, which sets the IPSAS), less so by governmental entities. Some 28 organisations belonging to the United Nations worldwide are in the process of adopting accrual accounting along IPSAS guidelines. At country level, Switzerland is the most prominent candidate that is adopting the full IPSAS suite, according to Hathorn. The federal government as well as the Cantons of Zurich and Geneva are in the process of doing so.