Accounting changes 'will be dagger to the heart' of final salary pensions

Published on Saturday 10 May 2008 14:25

CONTROVERSIAL changes to global accounting rules could be the last nail in the coffin for final salary pension schemes.

The Accounting Standards Board (ASB) is proposing the same rules apply to the reporting of final salary and defined contribution schemes.

Pension experts, including the Institute of Chartered Accountants of Scotland, are warning that employers could get 'cold feet' when they quantify their liabilities and this may force them to shut their final salary schemes.

The ASB wants pension deficits and surpluses for pension schemes reported in every primary financial statement, rather than spread over a number of accounting periods. Commentators have warned this could make some companies seem more volatile because scheme assets fluctuate with stock markets.

Another key proposal is that a 'risk-free' discount rate, reflecting all future cash flows, should be used to measure liabilities. This would replace the current corporate bond discount rate, which relies on financial assumptions.

The ASB has argued this change would ensure the future liability of pension schemes is accurately stated, but the National Association of Pension Funds has calculated the new accounting method could add 30bn of reported liabilities to UK final salary schemes.

Derek Scott, a professional pension trustee and member of the ASB's pensions advisory panel, has described the proposals as a "dagger to the heart of final salary schemes".

Scott said: "If I was a director of a company that hadn't closed its scheme, I would look at doing so now as the liability will be even bigger and there will appear to be more volatility."

A few years ago unions agreed to final salary schemes being closed as they thought they may re-open, but schemes will not be re-opened under the new accounting standards, according to Scott.

The changes are expected to make more companies want to sell their pension assets and liabilities to third parties, already a growing trend. Actuarial consultants Lane Clark & Peacock have estimated that the pension buyout market could reach 10bn this year, a fourfold increase on 2007.

While some liabilities are being offloaded to highly rated companies such as Legal & General, Scott is concerned about the long-term stability of new "equity-backed kids on the block" which have been set up to capitalise on the buyout market.

It is not just UK pension schemes that are under threat, as the ASB aims to make reporting methods consistent across the world. Scott said that last week 89% of Dutch MPs came out in favour of challenging the ASB on the proposals and are calling for support from the UK and Ireland.

Andrew Lennard, director of research at the ASB, is defending the plans. He said: "Pension scheme members will benefit. A problem is a lack of clarity in reporting at the moment. More clarity will give more confidence in the system."