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Accounting review to spark 'buyouts stampede'

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  • Accounting review to spark 'buyouts stampede'

UK - Proposed changes to how companies report their pension scheme obligations in their accounts could trigger a wave of pension buyouts, according to consultants and equity strategists.

Karen Olney, equity strategist at Merrill Lynch in London, commented on Wednesday's proposals by the Accounting Standards Board (ASB), by suggesting: "Having to face the music and move towards the 'risk free' rate means company liabilities would balloon, crystalling a higher deficit."

She argues even though the ASB has only made proposals so far, the board's reputation as the pensions think-tank will bear heavy on a decision to replace the International Accounting Standards Board current accounting recommendations.

"This may take three or more years to implement," said Olney, "but if it happens, companies will no longer be able to hide behind a less onerous discount rate (AA)."

Alex Waite, head of Lane Clark & Peacock Corporate consulting, agrees a review may encourage corporations to get the pension plan off the balance sheet even quicker.

"Pension scheme liabilities reported in the company accounts would be similar to buyout premiums, putting the buyout of pensions squarely on the boardroom agenda," he commented.

He added if the Pension Regulator (tPR) continues to use a company's FRS17 results as a funding trigger, the proposed changes would "substantially raise the bar for trustees" when setting the level of contributions to funding the pension plan.

According to Waite, this would result in even higher contribution levels for companies.

Patrick Bloomfield, partner at Hymans Robertson, added:  "The move from using AA bond yields towards gilt yields to discount liabilities would cause huge balance sheet strains and be a drain of profitability for years to come."

He added: "The proposed changes would also be likely to spark a stampede of companies buying-out their pensions schemes with insurance companies, as many companies would find buy-out costs substantially cheaper than the inflated deficit they are being asked to disclose on their balance sheets."

Additionally, he thinks possible changes would make it even less likely for employers to continue offering defined benefit pensions to employees in future: "Final salary schemes will simply be priced out of existence, despite the underlying pension schemes not having changed whatsoever."

If you have any comments you would like to add to this or any other story, contact Carolyn Bandel on +44 (0)20 7261 4622 or email carolyn.bandel@ipe.com

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