GLOBAL – International Accounting Standard Board chairman Sir David Tweedie has acknowledged the “daft” consequences of the current method of determining corporate pension liabilities.
“We have problems in accounting_standard FRS17 with the interest rate,” Tweedie is quoted as saying in an interview with the Association of Corporate Treasurers’ magazine.
“The first time we [the UK’s Accounting Standards_Board] looked at it the advice was to base it on the return on the assets. But we decided that couldn’t be right,” he told ‘The Treasurer’.
“If I invest in nothing but junk bonds I just don’t slash my liability, I’ve still got to fund it.”
The next proposal was to use the yield on equities. “We thought that made sense because if companies do well, the yield on equities and salaries will go up. We found that the correlation between salaries and yield on equities was zero. So that was out.”
“In the present market people are trying to avoid volatility and that itself has created volatility by diving in on a very short supply of bonds.
The yield has just disappeared so the liability has gone up. That’s daft. But there is not a lot we can do about that.
Whatever instrument we choose, if there is a shortage of the_instrument that is going to happen.”
“The actuaries should give us their view along with the evidence of what they see as the better answer.”
Earlier this week the Accounting Standards Board said it was seeking to amend FRS17 to bring it in line with the international IAS19 measure.