Editorial: Accounting reforms replace Solvency II woes

EDITORIAL: At a time when pension funds are already having to work hard to meet pensions liabilities, the arrival of new disclosure requirement "proposals" from the Accounting Standards Board could further increase the pressure on all European pension funds, and not just those based in the UK.

The ASB unveiled plans for discussion last week suggesting a company's financial results will, among other things, in future have to disclose their pensions liabilities as discounted to a "risk free rate" rather than a AA-rated fixed income product. While the response from the UK industry so far has been to criticise the impact it will have on companies' liabilities, what some pensions experts have noted is while more transparency and disclosure would be good for risk management, the long-term implication is it could force many pension funds to undo a lot of asset allocation diversification, and substantially increase both the risk to liabilities and costs to sponsoring employers in the process.

In short, it could inadvertently force employers to again consider whether they can afford to offer generous pension benefits because even those who have worked to do so will in future see a substantially higher cost.

It might seem these ideas are only applicable to the UK pensions arena, but consultants are aware the ASB and the International Accounting Standards Board (IASB) work closely together, so any proposals raised by the ASB are likely to be translated into proposals from the IASB. Indeed, recent cries from the Netherlands suggesting it should not be subject to IASB rules were perhaps an early warning indicator of insider knowledge about accounting reforms and its impact, rather than a comment on existing rules.

Much of the talk behind the scenes is pure speculation but early consensus among pensions industry experts is these proposals are not really "proposals" as suggested by the ASB; instead they should be seen as future requirements now set in stone, because drafting of these "proposals" has already taken considerable time.

It's true it could be a couple of years before they are implemented as standard practice to all European listed companies. But consultants say pension funds are not waiting until new rules are applied and are actively shifting from equities and other asset classes to bonds now to shore up their liability risk - but unwinding the positive gains to be had from higher risk investment strategies and at a higher long-term cost as a result.

Applying Solvency II requirements on pension funds is perhaps now looking less likely because it is understood corporate pension funds pursuing higher-risk strategies today will tomorrow have to change their asset allocation strategies, to effectively ensure pension funds are "solvent" on a day-to-day basis, rather than the long-term perspective experts have applied until now.