FDE Exclusive: Philip Broadley, group finance director, Old Mutual

Earlier this year, Philip Broadley, CFO of Old Mutual and past chairman of the Hundred Group of finance directors visited an exhibition in Florence on the activity of the city's Renaissance bankers.

"Florentine banks suffered from many of the same concerns we have today," observes Broadley, "about whether the bankers were facilitating trade or merely extracting an economic rent from doing so. There were many questions relating to risk-taking in Florence during the 15th-century. That demonstrates that none of the arguments is new; they just come round every once in a while."

The whole issue of risk is currently dominating regulatory thinking, particularly in Europe, and in the view of many it is skewing thinking on efficient markets. The very complexity of some proposed regulations, such as IORP 2 (Institutions for Occupational Retirement Provision) and Solvency II might even be contributing to the element of risk that they are supposed to be preventing.

"I suppose my anxiety is that we are living in an environment at the moment where, for understandable reasons, there is a desire to take risk out of everything," explains Broadley. "I think it is true to say that there can be no reward without some risk in any enterprise, and this is also true of banking. If we want risk-free banks, then we will either have to accept that our mortgages are repayable at call or that our deposit accounts have a 30-year notice period."

A key exception that Broadley and his colleagues take to the thrust of proposed EU legislation is that it conflates pensions funds with insurers. "This ignores the nature of a pension scheme and in the end the importance and value that attaches to the sponsor's covenant." While UK pension provision had taken a while to develop, Broadley believes that the current system, with the powers of the trustees and the ultimate backing of the Pension Protection Fund, works effectively.

Euro vision

In July 2011, the Hundred Group, in its submission to the European Commission's call for advice on the proposals from the European Insurance and Occupational Pensions Authority, argued that current pension provision across the EU was diverse. Therefore, any significant reform of funding requirements would not necessarily assist those countries with the lowest levels of provision. It would, however, impact disproportionately member states such as the UK that had widespread systems of funded defined benefit provision.

Broadley accepts that pan-European schemes might of themselves be relevant in the longer term. However, he is concerned they would be of less use to multinational companies that also had operations outside the EU and would in any case add considerable complexity.

He argues that, in the UK, members of defined benefit schemes generally understand their schemes and their benefits. They can "put their arms around" their pension provisions, which would not be the case in a remote, pan-European fund.

He has a further warning. "I would think that, increasingly, employers regard pension provision simply as part of the overall remuneration that they offer to their employees. I would put forward the argument that certainly very few large employers are now particularly thinking in terms of pension provision from the point of view of any welfare obligation.

"So with that in mind, there are still quite significant differences in remuneration practice in different markets," he continues. "Some of those are a function of the markets themselves and people's expectations. Some of them are also a consequence of other regulation."

Broadley cites the efforts to regulate banking pay. Just as the provision of saving products across Europe is still very different, so pension provision varies as a result of custom and practice. But he warns that over-regulation will be counterproductive. "It will lead to a further continuation of benefit reduction, the closure of defined benefit (DB) schemes, the switch to defined contribution often with lower contribution rates, buyouts and more conservative investment strategies for those DB schemes that do survive."

Though apparently arcane, he believes that this last element would be particularly relevant for the UK, more so probably than anywhere else in the EU. "DB schemes will want even less to invest in equities than they do currently," he explains. "Thus it increases the long-term trend, which one can observe in the UK market, which is that pension funds will not wish to be long-term holders of equity. If the pension funds are not holders of UK equity, who is?"

Cutting the clutter

Broadley sees the revision of IAS19 as being of particular value to general portfolio managers who need to have a view across various sectors. "There will be a reduction in profits shown in the financing line from the expected return on assets being changed to the discount rate," he observes, "and that will affect everyone and there will be a removal of spreading from the small number of schemes currently using it."

The impact will vary between firms, and he anticipates there is likely to be a large number of additional disclosures. "It is interesting that there are quite a number of initiatives underway in various quarters to 'cut the clutter' - the phrase that is used around financial reporting," he notes. "Yet here we have something that is going against that. The removal of spreading will increase volatility for some but the benefit ultimately for analysts is that there will be greater consistency between companies' disclosures."

Overview of changes introduced by IAS 19 Employee Benefits, as amended in 2011

The standard requires recognition of changes in the net defined benefit liability (asset) including immediate recognition of defined benefit cost, disaggregation of defined benefit cost into components, recognition of remeasurements in other comprehensive income, plan amendments, curtailments and settlements: Introduce enhanced disclosures about defined benefit plans.

Modify accounting for termination benefits, including distinguishing benefits provided in exchange for service and benefits provided in exchange for the termination of employment and affect the recognition and measurement of termination benefits.

Clarification of miscellaneous issues, including the classification of employee benefits, current estimates of mortality rates, tax and administration costs and risk-sharing and conditional indexation features.

Incorporate other matters submitted to the IFRS Interpretations Committee. Applicable on a modified retrospective basis to annual periods beginning on or after 1 January 2013, with early adoption permitted.
Source: Deloitte Global Services Limited

Objective of IAS 19

The objective of IAS 19 is to prescribe the accounting and disclosure for employee benefits, or all forms of consideration given by an entity in exchange for service rendered by employees. The principle underlying all of the detailed requirements of the standard is that the cost of providing employee benefits should be recognised in the period in which the benefit is earned by the employee, rather than when it is paid or payable.
Source: Deloitte Global Services Limited