Moody's decision to downgrade UK sovereign debt from AAA to AA1 could increase pressure on accountants to reduce balance sheet pension liabilities, warn consultants.

The downgrading of much sovereign debt around the world over the past few years, including the US, may have implications for pension accounting, said Broadstone actuarial director John Broome Saunders.

He said: "Balance sheet pension liabilities must be calculated using a discount rate based on 'high quality' bonds. But is 'high quality' meant to be a relative or absolute measure?

"Historically, this has generally been interpreted as bonds carrying a AA rating - but with credit ratings falling across the board, there's a growing view that, in the current climate, maybe single-A rated bonds are good enough to be 'high quality'."

Broom Saunders explained that singe-A bonds generally have a higher yield than AA bonds, and that using a higher discount rate leads to lower liabilities, and smaller deficits.

"Because these financial assessments are highly sensitive to the assumptions used, such a change could easily halve the size of a scheme's apparent balance sheet deficit. Of course, one needs to remember that this is all a bit of actuarial smoke and mirrors - the real cost of providing these benefits hasn't changed," said Broom Saunders.

First published 26.02.2013

monique_simpson@wilmington.co.uk