GLOBAL - The IASB has confirmed it is willing to listen to alternative proposals to using mark-to-market pricing for pensions accounting standards.

Stephen Cooper, a member of the IASB board, told NAPF annual investment conference delegates in Edinburgh, Scotland yesterday that the organisation has “sympathy with the frustration you feel” on issues such as the mispricing of risk where it is listed in company profit and loss accounts against post-retirement benefits.

His comments were made in response to a speech by the NAPF’s chairman, Lindsay Tomlinson, who argued there was a need for a review of “unsatisfactory” accounting standards. (See earlier IPE article: ‘Broken’ accounting standards need rational thought - Tomlinson)

But he said: “The difficulty we’ve had with fair value is if it is not market price what is it? Are we going to allow everyone to change their pension fund assets at will, depending on their perception of market price?”

He cited an example suggesting market pricing might be distorted under other methods - a situation it is trying to avoid - if a company thinks the market is underpriced by 10% and then adds 10% to pension fund assets, or where the corporate sponsor believes assets are overpriced by 20% and therefore reduces the value by 20%.

Cooper added: “We are interested to know what the alternative to fair value is, and we will listen. But if it’s not fair value, what exactly do you want?”

However John Broome Saunders, actuarial director at BDO Investment Management, rejected the NAPF’s call for a review of the pension accounting standards.
He said: “The NAPF simply don’t understand what pension accounting is trying to achieve. FRS17 has nothing to do with long-term funding. FRS17 is an attempt - albeit flawed - to bring the philosophy of fair value, mark-to-market valuation methodology to pension liabilities.”
“On this basis, FRS17 typically understates the true ‘fair value’ of pension liabilities - which can only be objectively defined as the price at which at which the liabilities can be transferred to a third party. Placing any lower value on liabilities is simply an actuarial conjuring trick,” he added.

Cooper, meanwhile, also confirmed the new exposure draft on pension accounting, to be released in a few weeks time, will not deal with defined contribution (DC) promises as previously thought. He said the issue of DC promises has been “put to one side and we will return to that as part of the long-term project”.

He said the major changes outlined in the draft will include removing the “corridor” smoothing approach as proposed, and change the way the income interest and expense item is calculated, as discussed by consultancy firms this week. (See earlier IPE stories: IAS19 pension charge to hit at a lower level than first proposed and IAS19 could force sponsors to push for lower risk strategies)

He suggested this might prove “most controversial” as the current use of expected return on assets had been previously criticised for perhaps not providing a faithful representation. He said the preferred approach is to in future calculate the income interest and expense by applying the discount rate to the net funding position of the scheme.

But he also confirmed there would be no change to the measurement of pension liabilities, or the discount rate and said the corridor approach was being removed to allow immediate recognition of any changes in the assets and liabilities of a scheme, rather than them being deferred.

The exposure draft would therefore “require that the gains and losses in respect to pensions are split into three”, as noted by Hewitt Associates and Mercer: the service costs, income interest and expense, and remeasurements, although the latter would only be placed into other comprehensive income rather than the profit and loss account.

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