New standard slaps £325m costs on finance sector

FINANCE COMPANIES will be hit by as much as £325m of extra costs as a result of the new International Financial Reporting Standard IAS19, a new survey has found.

FTSE350 finance companies told actuary and consultancy firm Barnett Waddingham their disclosed profits would be hit by the new rule, which was launched last week.

It forces companies to set the expected return on pension schemes' assets in terms of AA-rated corporate bonds, which generally offer lower returns than typical schemes' investment strategies.

This means companies cannot set expected returns according to the assets actually held by the plan; it could encourage them to invest in more secure vehicles than is currently the case, seeing as the potential higher return will no longer be reflected in the accounts.

Head of corporate consulting Nick Griggs said: "Some companies will have been affected more than others - those having schemes with riskier investment strategies with higher expected returns on scheme assets will be harder hit than those with more conservative strategies that expected to generate lower returns."

If IAS19 were in force during the latest accounting period, profits of defined benefits schemes would have been around £2bn lower, according to the companies surveyed. Total disclosed profits for the period in question stood at around £50bn, meaning the difference would have been substantial.

Commenting on the new standard, Big Four partners said it will have a substantial impact on companies with post-work benefit plans, but agreed the rules would significantly boost transparency and comparability.