EBA analyses impact of pension plans in capital

The European Banking Authority (EBA) published today a report analysing the impact that the revised IAS 19 Employee Benefits in conjunction with the deduction of net pension assets under the Capital Requirements Regulation (CRR) and changes in net pension liabilities may have on the volatility of institutions' own funds. The report concluded that in most cases there may be limited volatility of own funds due to changes in the accounting and prudential requirements that derive from the revised IAS 19 Employee Benefits and the CRR.

The main drivers of the impact on the volatility of own funds were found to relate to internal factors, such as the existence of defined benefit plans, their characteristics and their size compared to the capital position of the institution, as well as to external factors, such as the evolution of macroeconomic variables to the institution.

The EBA also highlighted that during periods of downturn, own funds may be adversely impacted due to the increase of actuarial losses and therefore leading to an increase of defined benefit pension fund deficits. However, the EBA specified that it would be a prudent approach to fully recognise these losses on own funds, as this would immediately reflect the adverse impact on own funds rather than deferring it to future periods.

The EBA finally suggested that institutions with relevant defined benefit pension plans should carefully consider the possibility of losses arising from such plans and hence incorporate them in their capital planning. This shall allow institutions to secure sufficient capital to withstand losses that could originate from these plans.

Legal basis and background

The Capital Requirements Regulation (CRR) mandates EBA to prepare a report on whether the revised IAS 19 Employee Benefits in conjunction with the deduction of net pension assets as set out in Article 36(1)(e) and changes in net pension liabilities lead to undue volatility of institutions' own funds. The report must be submitted to the Commission by 30 June 2014. Taking into account the work of the EBA, the EU Commission will prepare a report on this issue that will be delivered to the European Parliament and the Council by 31 December 2014.

The report is also based on a discussion paper published by the EBA in February 2014 where the EBA put forward its preliminary views on these changes with the aim of gathering stakeholders' input on this topic. The input received has assisted the EBA in the finalisation of the report.