TT Ernst & Young Actuaries 1Pension funds and accouting regulationsJune 2006 Accounting pension funds A study on the Dutch situation by Martin Jansen, senior manager of E&Y Actuaries

TT 2Pension funds and accounting regulationsJune 2006 Agenda 3 aspects of pension plans Influence of the international accounting rules Fair value: not only for the asset side of the balance sheet Conclusions Appendix: illustrative example of IAS19 calculations 3 aspects of pension plans Influence of the international accounting rules Fair value: not only for the asset side of the balance sheet Conclusions Appendix: illustrative example of IAS19 calculations

TT 3Pension funds and accounting regulationsJune aspects of pension plans 1.The promiss (defined benefit or contribution) 2.The funding: capital funding or pay-as-you-go 3.The execution: insurance company, industry wide fund (multi-employer) or corporate pension fund 1.The promiss (defined benefit or contribution) 2.The funding: capital funding or pay-as-you-go 3.The execution: insurance company, industry wide fund (multi-employer) or corporate pension fund

TT 3 aspects of pension plan: the promiss (1) Defined contribution (DC) The pension ultimately received by the former employee is a function of the contributions that have been made The cost to the employer is therefore fixed and predictable No legal or constructive obligation to meet shortfall Defined contribution (DC) The pension ultimately received by the former employee is a function of the contributions that have been made The cost to the employer is therefore fixed and predictable No legal or constructive obligation to meet shortfall Defined benefit (DB) The pension is based on a formula that is not simply based on the contributions made, and the employer retains a risk that they will not be enough to pay the pensions The eventual cost to the employer is therefore more difficult to predict 4IFRS Accreditatie Module 3 / IAS19 - Employee benefits 3TP1June 2005

TT 5Pension funds and accounting regulationsJune aspects of pension plan: the promiss (2); final pay D D A A B B C C E E D E E Salary Time Date of Entry Date of Entry Today After 1 year After 1 year Pension- date Pension- date Today Pens.date A - Vested benefits A+B - Accumulated benefits A+B+C - Projected benefits D - Service costs A - Vested benefits A+B - Accumulated benefits A+B+C - Projected benefits D - Service costs

TT 6Pension funds and accounting regulationsJune aspects of pension plan: the funding In case of DC: capital funding In case of DB: capital funding (in the Netherlands obligatory) or pay as you go In case of DC: capital funding In case of DB: capital funding (in the Netherlands obligatory) or pay as you go Date of entry Date of entry Pension date Pension date Capital funding Pay as you go

TT 7Pension funds and accounting regulationsJune aspects of pension plan: the execution Way plans are executed in the Netherlands Multi-employer plans - Industry plans –Where a number of different employers (often those in a particular industry) run a pooled plan Insured plans - Collective or individual plans –Where the contributions are paid as premiums to an insurance company Pension fund of Corporate Way plans are executed in the Netherlands Multi-employer plans - Industry plans –Where a number of different employers (often those in a particular industry) run a pooled plan Insured plans - Collective or individual plans –Where the contributions are paid as premiums to an insurance company Pension fund of Corporate

TT 8Pension funds and accounting regulationsJune 2006 Influence of the international accounting rules (1)

TT 9Pension funds and accounting regulationsJune 2006 Influence of the international accounting rules (2) Important for pension funds as well because: 1.Corporate pension funds are consolidated into annual balance sheet and P&L of corporate 2.Consequences on annual reports of corporates make these companies change their attitude towards pensions (DB not attractive: complex and difficult to manage the costs) Important for pension funds as well because: 1.Corporate pension funds are consolidated into annual balance sheet and P&L of corporate 2.Consequences on annual reports of corporates make these companies change their attitude towards pensions (DB not attractive: complex and difficult to manage the costs)

TT 10Pension funds and accounting regulationsJune 2006 Fair value: not only for asset side of balance sheet In the Netherlands: till 2005 pension liabilities for pension funds discounted on 4% fixed interest rate. As from now moving to discounting on risk free rate of return (not one rate, but applying the yield curve on the cash flow of the liabilities). Supervisor publishes monthly this curve. Remark: as per December 31, 2005 the whole curve is below 4% => need to revaluate the pension liabilities. In the Netherlands: till 2005 pension liabilities for pension funds discounted on 4% fixed interest rate. As from now moving to discounting on risk free rate of return (not one rate, but applying the yield curve on the cash flow of the liabilities). Supervisor publishes monthly this curve. Remark: as per December 31, 2005 the whole curve is below 4% => need to revaluate the pension liabilities.

TT 11Pension funds and accounting regulationsJune 2006 Fair value: yield curve to discount cashflow of pension fund

TT 12Pension funds and accounting regulationsJune 2006 Consequence on balance sheet of pension fund: example of increase of rates of 1% In next example: the market value of assets will rise 5% with every decline of 1% in interest rates and liabilities will rise 15%. Technical: duration of assets and liabilities are 5 respectively 15. This is a common Dutch pension fund. In next example: the market value of assets will rise 5% with every decline of 1% in interest rates and liabilities will rise 15%. Technical: duration of assets and liabilities are 5 respectively 15. This is a common Dutch pension fund.

TT 13Pension funds and accounting regulationsJune 2006 Consequences: need for insight in risks Dutch pension funds do have to change into market value of their pension liabilities as well. This new law starts in Funds already investigate their interest rate sensibility and start to invest in derivatives as “interest rate swaps”. Dutch pension funds do have to change into market value of their pension liabilities as well. This new law starts in Funds already investigate their interest rate sensibility and start to invest in derivatives as “interest rate swaps”.

TT 14Pension funds and accounting regulationsJune 2006 Conclusions on a Dutch pension fund study New accounting rules are complex, but give new insights. Pension funds “feel” the consequences of the accounting rules of corporates. Awareness of pension costs (caused by new rules) rises and results in new pension plans. Awareness of risks will result more and more managing investments risks. New accounting rules are complex, but give new insights. Pension funds “feel” the consequences of the accounting rules of corporates. Awareness of pension costs (caused by new rules) rises and results in new pension plans. Awareness of risks will result more and more managing investments risks.

TT 15Pension funds and accounting regulationsJune 2006 Illustration Pension obligation and plan assets - Specification

TT 16Pension funds and accounting regulationsJune 2006 Illustration Corridor - Calculation (1)

TT 17Pension funds and accounting regulationsJune 2006 Illustration Corridor - BS and P&L (2)