UK pension scheme deficits will rise to over £100bn at the "critical" 31 March company accounting date, according to analysis from an employee benefits firm.
Buck Consultants said that with some AA corporate bond indices yielding below 4% coupled with the prospect of future inflation rising, the current pensions schemes accounting standards will force companies to recognise higher pension scheme deficits on their balance sheets.
Over half of all UK companies use 31 March as their year end and these companies will be required to use market conditions at that date.
Marcus Hurd, Buck Consultants principal and senior consulting actuary, said: "During difficult economic times, actuaries and finance directors need to use common sense.
"Whilst the funding regime allows them to be pragmatic, current accounting standards do not permit common sense. Many companies will be feeling the pain of following strict accounting rules at 31 March."
He said that many companies will use the limited flexibilities which are available in current accounting standards to help east the situation, and added: "It would be a travesty if Company managers make decisions based on these annual numbers, which are inflated by difficult economic circumstances."
The pensions accounting standards prescribe that future pension payments are discounted at AA corporate bond yields regardless of how the scheme invests its actual assets.
Buck Consultants said that some perceive the current economic markets to be distorted and many economists are expecting yields to rise quicker than the market is currently pricing.
Steven White, Buck Global Investment Advisors managing director, said: "Schemes need to take steps now to ensure they can capture improvements as they arise. Gradually improving global economic conditions and current yield curves support the view that increases to long-dated yields are approaching.
"Small changes in long dated yields can have a dramatic impact on scheme funding levels and many schemes are looking to capture those improvements once they materialise."
First published 28.03.2013
monqiue_simpson@wilmington.co.uk
