According to EDHEC, the IASB proposal gives pension funds no incentives to manage risk properly; instead, by suggesting that pension assets and liabilities can be considered held for trading, pension funds are given incentives to shed these liabilities.

The author of the report, Samuel Sender, Applied Research Manager with EDHEC-Risk, puts forward the following arguments in this position paper:

- EDHEC firmly warns the IASB against the temptation to suppress the corridor approach, whereby actuarial gains and losses which fall within a corridor need not be recognised, as this would lead to a significant reduction in holdings of risky assets in pension funds.
- EDHEC supports smoothing market yields as a way to filter out market noise.
- EDHEC also supports the amortisation of pension surpluses and deficits, in a manner consistent with the general treatment of long-term assets and liabilities.
 Finally, EDHEC recommends that pension funds use the projected benefit obligation to compute pension cost but that they report the accrued benefit as the pension liability in their balance sheet, a measure that would then be consistent with the prudential measure of pension liabilities.

This study was produced by EDHEC-Risk as part of the AXA Investment Managers ‘Regulation and Institutional Investment’ research chair.

The position paper “IAS 19 – Penalising changes ahead” can be downloaded by clicking on the following link:
docs.edhec-risk.com/mrk/000000/Press/EDHEC_Position_Paper_IAS19.pdf

About EDHEC-Risk Institute
EDHEC-Risk was set up in 2001 to conduct world-class academic research in risk and asset management and highlight its applications to the industry. The centre’s team of 46 researchers carries out six industry-sponsored programmes focusing on asset allocation and risk management in the traditional and alternative investment universes.
The EDHEC Risk research chairs involve a close partnership with a sponsor and a commitment from EDHEC over three years leading to international academic publications and position papers aimed at professionals, institutional investors and regulators. The research chairs include three types of actions: carrying out the research; organising the dissemination of the research and presentation at conferences. The research topics and associated plans are drawn up by EDHEC and validated by the sponsor.
To optimise exchanges between the academic and business worlds, EDHEC-Risk maintains a website devoted to asset management research for the industry, circulates a monthly newsletter to over 350,000 practitioners, conducts regular industry surveys and consultations, and organises annual conferences for the benefit of institutional investors and asset managers. The centre’s activities have also given rise to the business offshoot EDHEC Asset Management Education. EDHEC Asset Management Education helps investment professionals to upgrade their skills with advanced risk and management seminars and its PhD in Finance programme.
www.edhec-risk.com