UK - The current system of pension accounting standards is "broken", and standard setters need to remove excesses of volatility as well as exercise some "rational thinking", according to the National Association of Pension Funds.

Speaking at the NAPF annual investment conference in Edinburgh today, Tomlinson, who is chairman of the organisation, confirmed the NAPF launching a major review of pension accounting standards starting with an accounting summit, to examine "how standards might change from their current unsatisfactory state". (See earlier IPE story: NAPF to investigate pensions accounting alternative)

The NAPF claimed the existing standard of FRS17 requires companies to value the assets and liabilities of the pension fund in a way that overstates the likely long-term costs of funding the pensions, and results in a high degree of volatility appearing on balance sheets. It claims this has therefore led to many companies closing their schemes.

"Pension funds are long-term institutions but today's accounting standards fail to reflect this," said Tomlinson. "The NAPF want to find a better approach to pension accounting that balances transparency with a less volatile assessment of assets against long-term liabilities."

Speaking to delegates from his personal point of view, Tomlinson highlighted the "flawed" system of using mark-to-market pricing for long-term assets, and instead argued long-term accounting needs "actuarial smoothing".

He noted that having acknowledged the presence of pension deficits in accounts, "as a society we're being driven into an economic mistake".

He believes this has been caused by the mis-pricing of UK bonds at the long-end and exacerbates deficits when combined with mark-to-market pricing. He argued it eventually encourages de-risking of the pension fund and a move to bonds, which then affects gilt yields and the funding position of the scheme.

"If a long bond is mispriced, a mark-to-market approach leads to a pro-cyclical destruction of pension funds," said Tomlinson. "We need to avoid a serious misallocation of capital. My plea to the IASB is to think very hard about applying mark-to-market practices. For long-term funds, the mark-to-market paradigm has a very serious question mark hanging over it," he added.

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