"The Swiss Pension Accounting Controversy": an Empirical Investigation of the Value-Relevance of Swiss Pension Plans

Internationally, Switzerland has one of the highest ratios of occupational pension assets to GDP. Also, more than three-fourths of all employees are covered by a mandatory occupational pension scheme. Since long, accounting standard-setters throughout the world have been wrestling with the issue of pension accounting. In particular, how to best account for Swiss pension plans has been controversial. By law, these plans must be legally separate from the employer (i.e., sponsoring firm) and they have to be sufficiently funded. Nevertheless, in line with the International Accounting Standard No. 19 (IAS 19), Employee Benefits, Swiss pension plans must be classified as defined benefit plans, potentially triggering the recognition of a material net pension (asset)/liability (NPL) on the balance-sheet of the sponsoring (i.e., reporting) firm. Furthermore, net pension (income)/cost (NPC), to be recognized in profit or loss, has to be derived based on regular re-valuations of the NPL. In contrast, in line with the Swiss Accounting and Reporting Recommendation No. 16 (ARR 16), Pension benefit obligations, the recognition of the NPL arising from a Swiss pension plan is smoothed along the statutory funding ratio of the plan, and, accordingly, NPC is mainly based on the employer contributions (EC) paid. Based on hand-collected data from annual reports of industry and financial firms listed in Switzerland, totaling 910 firm-year observations across the sample period of 2004 to 2012, evidence is provided here for the general decision-usefulness of financial information reported on Swiss pension plans. Notably, evidence suggests that net pension (income)/cost (NPC) recognized in profit or loss is generally more decision-useful to investors than the net pension (asset)/liability (NPL) recognized on the balance-sheet as well as the unrecognized net pension (asset)/liability (NPLNR) disclosed in the notes. Accordingly, findings are generally in support of a Revenue-Expense Approach (REA) to pension accounting. Further, the evidence presented here suggests that the decision-usefulness of pension accounting may also be dependent on industry classification (i.e., industry vs. financial sector) of the reporting firm. Lastly, the study may also contribute to the controversy about how to best account for Swiss pension plans. Notably, financial information on Swiss pension plans reported in line with IAS 19 (2004) is found to be more adequately reflected in the market value of equity of reporting firms, than respective information in line with ARR 16 (2005).