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NAPF suggests interest-rate swaps discount rate

UK – The National Association of Pension Funds has suggested that pension liabilities should be discounted at a “risk free” rate derived from interest-rate swaps.

The NAPF has put forward a paper proposing that liabilities should be discounted at rate derived from interest rate swaps - rather than the current method using AA corporate bond rates.

“This would have the added benefit of better matching of scheme liabilities compared with current practices,” the association said. “The disclosure in the notes to accounts of the projected liability would also include the impact on the liability if future investment returns are above the risk free rate in line with those assumed for the investment policy of the scheme.”

“The paper argues the case for further development of the accounting regime for pensions,” said NAPF chief executive Christine Farnish. “We believe the approach we suggest has a number of advantages over the current standard, while still fitting within the IASB’s framework for the preparation and presentation of financial statements.”

Farnish told the NAPF’s autumn conference that around 71% of private sector schemes polled in its annual survey have increased employer contributions in order to address funding pressures, with 41% increasing employee contributions.

And she said that the average long-term funding costs for private sector employers with final salary pensions has risen from 15.7% in 2003 to 16.6% this year. For defined contribution schemes, the cost to employers was 7.6%.

She said: “Today’s survey offers stark evidence of the risks and liabilities facing employers with defined benefit pension schemes.

“Even the most committed firms are now struggling to manage costs, and it seems that we are down to the bare bones of DB provision in the private sector.

“There are, of course, a number of reasons for this growing cost. Longer life expectancy and lower investment returns have obviously played a role.

“But the government does not emerge from this with any credit. Having burdened occupational pensions with an additional five billion pounds annual burden since 1997, the government has compounded the problem by failing to boost incentives for scheme providers, failing to reduce red tape, and failing to offer any long term vision for the future of pension provision.”

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