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Speaker(s): Graham Pearce (Mercer Deutschland GmbH)
IFRS or US GAAP is often taken to be a measure of "fair value" of employee benefit related liabilities.
The paper would discuss the valuation of pension and similar obligations, and why the value a buyer or seller may place on a given liability may differ from each other:
- Different buyers and sellers in corporate transactions can legitimately place very different values on the same obligations as a result of factors such as the company's cost of capital and the value it places upon risk.
- The main internationally recognised accounting standards neither allow for the degree of control that a sponsoring employer retains nor the degree of control that the sponsoring employer has over the pace and nature of funding - both of these can significantly impact the ultimate cost of providing the promised benefits and the risk to the sponsoring employer - or the degree of control the employer has over terminating or amending the plan
- The value of options or guarantees can be underestimated due to the deterministic methodology and assumptions used in valuations
- The future cost of administering past service accrued liabilities is often ignored
- The future cost of mandatory levies (e.g. statutory insolvency insurance contributions such as PBGC premiums in the USA) relating to past service accrued liabilities is often not capitalized
- Risk sharing between members and companies is not generally explicitly allowed for in accounting valuations, but can significantly impact the expected cost and long term risk associated with benefit plans
- The extent to which benefits vest, and the increases to accrued benefits between the date of leaving service and retirement, can influence the degree to which the liabilities are "debt-like" in nature
Recognising these differences can help actuaries add greater value to their clients in transactional situations.