The accounting standards currently used to calculate companies' pension scheme assets and liabilities are undermining pension provision in the UK, according to a report published today by Leeds University Business School
Co-authored by Dr Iain Clacher, a lecturer in finance and Professor Peter Moizer, a dean and professor of accounting at the business school, the report, Accounting for Pensions, says it aims to show "the true impact of mark-to-market accounting".
Commissioned by the National Association of Pension Funds, it argues that the current standards are not only inappropriate for assessing the long-term liabilities of pension funds, but can also lead to unintended consequences, such as higher costs.
"Because schemes are too cautious they opt for bonds rather than equities or other 'higher risk' products and so they are losing out on their investments," says Dr Clacher.
The same point is made by Lindsay Tomlinson, chairman of the NAPF: "By choosing to invest into low return assets, pension schemes are not only likely to be following a sub optimal investment strategy, but will also support the economy less at a time when it is risking a double dip recession."
The report recommends that:
•Pension liabilities should be valued as the discounted present value of future net asset/liability cash flows, thereby allowing for the asset/liability interaction that occurs over the life of a pension scheme.
•Pension disclosures should include the actual cash contributions that a corporate sponsor is committed to as a result of negotiation with scheme trustees and/or the Pensions Regulator.
•The recognition of a discounted cash flow model of pension accounting through the accounts of the firm can be viewed as the long-term position of the scheme. To make this number useful, company accounts should also disclose the market value of scheme assets relative to a discounted pension liability.
According to the report, the fact that the current accounting standards introduce short-term volatility into the measurement of companies' pension surpluses and deficits has led companies to close perfectly viable pension schemes.
"The recent turmoil in the global stock markets has highlighted, more than ever, the inadequacy of mark-to-market accounting to evaluate the long-term liabilities of pensions," says Tomlinson. "The current standards can have serious repercussions for pensions provision, retirement saving and the economy."
Clacher, who wishes to "open up the debate", concedes that alterations to standards will be hard to come by.
"Changes will need to be undertaken by the International Accounting Standards Board and require world wide support. We need a significant overhaul of current accounting standards and that will not be easy as they need to be changed everywhere, not just in the UK," he says.
But Brian Peters, partner in the pensions practice at PwC, believes that progress in accounting has an overall positive benefit for companies and their shareholders.
"Accounting standards have definitely had an impact on corporate decisions about pension schemes. While not always good for defined benefit scheme members, these decisions have been essential for managing risk. Most investors have welcomed the greater transparency although disclosures could continue to be improved," says Peters.
Ros Altmann, pensions expert and director general of SAGA, says that the report is pointing the finger of blame for defined benefit fund closures at the wrong target.
"The reason pension schemes are closing is not because of mark to market accounting. It is more because the costs of providing pensions have consistently been underestimated and employers were led to believe that equities could match pension liability increases but this is not the case," says Altmann.
07.09.2011
azeevalkink@wilmington.co.uk
