Stability or transparency?

Here is the text of a short presentation I gave this morning on the occasion of the General Assembly of the European Federation of Accountants in Brussels. The general consensus emerged that there is no direct connection between financial reporting at the micro (firm) level and macroeconomic stability. This differentiation is crucial in the debate.

The subsequent Panel on the Internet - An opportunity to empower investors through accessibility or a risk for the reliability of financial information? with the US SEC's CIO Corey Booth among others made me doubt whether the European profession is really aware of the drastic impact that XBRL as a disruptive technology is going to have on the financial reporting value chain.

P.S. Other conference documents are available at the FEE's website.

IAS 19 to enter the risk-return continuum?

epn has an fascinating article about a possible approach to new pensions accounting, based on deconstructing any plan's risks into four distinct risk categories, accounting for them separately:

asset value risk

interest rate risk

mortality risk

compensation risk.

This way, it should be possible to move away from the current standard's black or white approach to classifying pension plans as DB if they do not match distinct DC criteria. Much of the article is dedicated to the analysis of Swiss and Belgian plans which by law feature a mix of DB and DC characteristics that force such plans to be accounted for as DB.

Faithful representation of the economic reality of plan liabilities appears to be much better warranted under such a structured approach. Furthermore, corporate sponsors' risk management towards pensions liabilities will be much improved, if not enabled, since the industry has built a lot of experience in structured instruments. Some preparers may be fazed by the approach's additional complexity, but once they realise that it might actually help them to better mitigate risk, they ought to embrace it.

Global pensions survey

While Allianz already enters the fray, dutch competitor Aegon prepares the ground with an extensive survey, a summary of which is available here. The report's hardly surprising key findings are:

1. Complexity of pension regulations affects European competitiveness: Dealing with disparate national regulations of pension plans is especially difficult in Europe, affecting all multinationals with sizable operations there. Three out of four experts surveyed consider the complexity of pension regulation in Europe as a factor affecting labour competitiveness. According to the study, this has resulted in increasing the determination of multinationals to seek a greater level of consolidation of pension affairs in Europe.

2. Multinational firms will lead the way: The survey shows that although pension systems currently remain country-specific, multinational firms have taken the lead in driving cross-border pension integration. They have influenced the direction of the market into designing and implementing pragmatic solutions for the management of global pension arrangements.

3. Clear shift of risk from company to individual: Although there are differences between countries regarding the relative use of defined benefit and defined contribution plans, there is broad consensus among experts surveyed that the global trend of shifting risk and choice from a company's balance sheet to individual employees will continue.

P.S. Thanks to Aegon for sending a copy of the full report. It is striking that despite of the Swiss pensions market's relative size and maturity, none of the 115 experts queried represent a Swiss firm. Have Swiss pensions entered the dubious realm of insignificance?

European ComPension by Allianz

In line with our earlier note, Allianz has kept word in presenting a pan-European pensions product called ComPension. As the product is only on offer in Germany, Italy and France, the pan-European aspect is rather limited at this point, but the offering is intended to be expanded gradually to further EU member states.

The product is based on a universal investment concept and seems to cater for the German Durchführungswege fund and direct insurance, thus is limited to defined contribution. It seems to enable corporations to offer comparable provisions across the countries covered by the plans, and it offers an annual overview of effective implementation.

Available investment vehicles are Luxembourg based Allianz European Pension Balanced or Dynamic. According to Allianz' statement, these vehicles are invested primarily in European shares and pension funds, which is rather surprising since the equity portion ought to be allocated globally. We will try to get a closer look at the detailed product features.

FSA not to use XBRL [UK]

There have been a number of reports recently (example) that gave rise to the perception that the UK FSA "ditched XBRL" in the context of its new Mandatory Electronic Reporting (MER), and that this was new news. Given the FSA's weight as a leading European financial regulator, this would appear like a major setback to XBRL's global momentum.

However, this perception needs to be qualified. A recent FSA statement maintains that the stated position is a simple reïteration of a policy established earlier, hence the reports are repackaged old news. The FSA continues to develop its MER system using XML, which can be described as a related, but more generic file format version of XBRL. A later migration from XML to XBRL is thus by no means precluded, especially seeing the FSA's main concern that there is not "sufficient XBRL experience within the UK currently to develop this system without incurring additional cost and risk". This assessment is transient by nature.

That being said, it appears unfortunate that the FSA backtracks behind its 2004 committment to XBRL, namely to develop and publish an XBRL taxonomy. This would be a more appropriate way going forward, rather than deploying a mature technology in a newly implemented financial market infrastructure project, with which the FSA could play the rôle of an essential catalyst.