UK - The Accounting Standards Board (ASB) has admitted it will have to publish another paper on the use of a risk-free discount rate to "reconsider" and take into account the mainly negative responses to its first consultation.

Speaking at the annual conference of the National Association of Pension Funds (NAPF), Ian Mackintosh, chairman of the ASB, revealed there had been 103 responses to its discussion paper 'Financial Reporting of Pensions'

However, he highlighted one of the most controversial areas was the proposal to introduce a risk-free discount rate, instead of using corporate bonds, to measure pension liabilities.

"We were either brave and/or stupid enough to propose a risk-free rate. There were some good papers in response to this, including asking what do we mean by a risk-free rate, as it is not as simple as it sounds. So we need to tackle that," he said.

In particular, Mackintosh said respondents were most concerned about the behavioural consequences of changing discount rates, as it would increase pension deficits by a significant amount and make defined benefit schemes even less attractive, and noted even the former pensions minister Mike O'Brien had expressed his concerns to Mackintosh in a meeting between the DWP and ASB. (See earlier IPE article: O'Brien warns ASB plans may 'hasten' DB closures)

That said, he pointed out the International Accounting Standards Board (IASB) has already announced they have a full agenda until 2011, which means "you can all breathe easy, as nothing will happen until 2012, and there is no guarantees what that will be".

Mackintosh said the ASB was not offended so many had disagreed with the proposals, not only on the discount rate but on other issues too, including whether pension plans should be included in consolidated financial statements, as "that is what the discussion paper is for".

But following the number of responses disagreeing with the changes to the discount rate, Mackintosh said: "We are going to have to do another very good paper on this topic and we will have to reconsider this, taking into account the comments we've received, before coming to a conclusion".

He did also warn "this won't be the end of it, as the conclusions will then need to be reviewed by the IASB", once the ASB submits a report containing final recommendations. 

The ASB also revealed another issue which needs more discussion is whether pension liabilities should be recognised based on future liabilities - as is currently the case - or on current salaries.

Mackintosh revealed: "The Board was split down the middle on this, with only a very small majority favouring a current salary basis. In addition, the responses we received was the same; split almost 50:50. So we're not sure where we're going to go with that. We will have to have another debate to compare the two options.

He also confirmed the ASB disagrees with the IASB's proposals for introducing a definition of 'contribution based schemes'.

"In our paper, the principle is that the calculation should be the same for everyone with no distinction between schemes. The IASB has gone completely the other way, we understand following pressure from the US, and we have put in a response where we oppose this view," added Mackintosh.

Meanwhile, in response to questions about the issue of mark-to-market pricing, the chair of the ASB pointed out "the real problem is what is the alternative?"

"The banks want to take some assets away from mark-to-market and value them in a different way, but what way? It's a very hard question, and for the banking sector the IASB will consider it next Tuesday and the EU by the end of the month so something will be done, maybe from both, which could have ramifications going forward," said Mackintosh.

He added: "The focus at the moment is the banks, but there is no logical reason why it [any changes] wouldn't apply to pensions."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com