The UK Accounting Standards Board (ASB) has issued a new draft accounting proposal for pension funds based on market values, which looks set to replace the present SSAP24 standard, marking a sea change in UK opinion on pension accounting.
The new standard (FRED 20) follows on from the swing to market valuations in American and international accounting standards such as IAS19.
SSAP24 uses smoothed actuarial projections to assess the long-term cost of funding final salary pension plans. Any variations in regular cost are spread forward and recognised gradually over the average remaining working lives of employees.
FRED 20 introduces volatility into the surplus or deficit measurement. Internationally this volatility is dealt with by averaging the market values over a number of years and/or spreading the gains and losses forward in the accounts over employee service life.
A similar proposal for change on pension accounting was overwhelmingly rejected in the UK in 1995.
Sir David Tweedie, ASB chairman comments: “SSAP24 has lost all credibility. We are replacing it with an approach that is consistent with international standards in the measurement of the pension scheme surplus or deficit and takes a step forward on immediate recognition.”
The removal of equity dividend tax credits and resulting changes in UK dividend growth patterns stemming from share buy backs, has also prompted the change, according to the Asssociation of Consulting Actuaries.
Paul Greenwood, actuary and head of retirement research at consultant William M Mercer, notes that many UK actuaries have already moved to the market-based valuation methods proposed under the ASB’s new standard. He adds that is difficult though to predict the overall effect on UK company balance sheets. “Some companies will declare higher profits initially, and others lower - depending on the circumstances of each scheme, such as the size of any fund surplus and the maturity of the scheme.”
Schemes using long-term actuarial calculations will see increased liabilities due to the forced recognition of current yields, which are lower than previous long-term averages, he notes, although he adds that many mature schemes can offset this with the additional interest from taking assets at full market value.
But he warns: “The $64,000 question is, what will be the effect of these figures on company market values? How analysts and the market interpret these figures is the key to their impact on company performance and, potentially, the future of final salary schemes.”