UK - Existing accounting standards should be ‘fundamentally reviewed’ with pension funds expected to include future benefit liabilities on its financial statements, the Accounting Standards Board has claimed. 

In a discussion paper launched today entitled ”The Financial Reporting of Pensions”, the ASB draws on principles applied to other accounting issues to suggest changes to the way employers and pension schemes report the relevant assets and liabilities.

The paper outlines a series of changes to the existing International Accounting Standard 19 (IAS19), including a suggestion financial statements should report the actual return on assets instead of the expected value, to better reflect the underlying economic reality.

In addition, the ASB proposes employers start measuring liabilities using a risk-free discount rate, rather than the existing method of discounting based on AA corporate bond rates, which aim to reflect the credit risk of the liabilities.

The discussion paper suggested changes in surpluses and deficits should be reported when they arise, rather than spread over a number of accounting periods, while the possibility of removing the effect of future salary increases should also be analysed, as it could reduce the size of liabilities.

Reporting for pension plans was also addressed. In particular, the ASB recommended schemes should be required to include the liability of paying future benefits on its statements, and the relationship between the scheme and the employer should be clearly reported, such as the financial impact of an employer covenant.

The ASB said it had developed the paper to help influence the review of IAS19 being conducted by the International Accounting Standards Board (IASB), as companies should provide full and transparent information on its exposure to pensions, including deficits, but existing standards “do not always achieve this as well as they might”.

It pointed out some companies “dispute the measurement techniques”, while changes in financial obligations  are “not always reported clearly and promptly”, leading the ASB to conclude a “fundamental review is needed”.
The organisation, part of the Financial Reporting Council (FRC), claimed accounting thinking “has moved on” since the development of FRS17 and IAS19 in the 1990s, and  argued the new proposals avoid having to distinguish between defined contribution (DC) and defined benefit (DB) plans, making them applicable to the growing number of hybrid pension plans. 

Ian Mackintosh, chairman of the ASB, said: “The current generation of pension accounting standards have served the financial community well, but the time is right for a fundamental review. This paper presents a coherent set of proposals, which sets out the agenda for such a review.”

The discussion paper will close to responses on July 14 2008, and after consideration of the comments received, the ASB intends to publish a report setting out final recommendations for consideration by the IASB and the Financial Accounting Standards Board (FASB).

But BDO Stoy Hayward Investment Management warned the proposals are a “real kick in the teeth” for DB scheme sponsors.

John Broome Saunders, actuarial director at BDO said: “At a stroke, hard-earned balance sheet surpluses will disappear, and, even worse, sponsors will find themselves facing an uncontrollable roller-coaster profit and loss ride.”

“Companies will move further into bond investment in a desperate attempt to avoid the dangers of a highly volatile bottom line, and as a result, funding costs will increase. Thus the pensions nightmare continues,” he warned.