Mark-to-market pricing 'needs addressing'

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  • Mark-to-market pricing 'needs addressing'

UK - Mark-to-market accounting is “not helping” pension funds and the issue needs to be addressed, delegates at the National Association of Pension Funds (NAPF) investment conference were told.

Lindsay Tomlinson, vice-chairman of Barclays Global Investors (BGI) Europe, digressed slightly from a presentation on whether pension funds are to blame for the economic crisis to highlight concerns with fair value accounting.

He said market values or modelled market values are supposed to provide “transparency and a true economic picture” of a company, however a problem with this is he believes there is a “natural economic and market cycle”.

In a presentation to NAPF delegates, Tomlinson pointed out markets always over-react, either positively or negatively, and referred to a book by Ben Graham, The Intelligent Investor, which describes the market as a person ‘Mr Market’ who is neurotic and subject to volatile mood swings between euphoria and depression.

Tomlinson warned delegates “in my view if we yoke our financial accounting to the market it means we’re yoked to a manic depressive”, and argued there are no longer any “natural buyers” of equities in the UK as both life insurers and pension funds have diversified into more global holdings.

Tomlinson argued, among other things, the use of mark-to-market accounting makes “pension costs prohibitive” for sponsoring employers and added: “I don’t think it is helping us. It needs to be addressed but nobody wants to say it”.

Meanwhile, despite an earlier speech by Hector Sants, chief executive of the FSA, in which he said pension fund trustees should have done more to challenge actions by companies prior to the financial crisis, (See earlier IPE article: FSA attacks investors for not doing enough) Tomlinson admitted corporate governance is an issue, but is “not at the top of the list”.

He told attendees the pension industry had “done a tremendous amount” in the area of corporate governance, particularly following Lord Myners review in 2001, and admitted while there is recognition “there is more to do” overall the industry is doing a good job.

“We’ve been through a rip-roaring credit bubble, and lived beyond our means for years and the chickens are coming home to roost,” said Tomlinson as he noted the UK had experienced a 15-year “upswing” but instead of the periodic recessions “to clear out the excesses” in the system, the problem had built up over 15 years so when the bubble finally burst “it was really toxic”.

He said some of the causes of the financial crisis included “inadequate international supervision”, large global imbalances in markets, and the growth of the “shadow banking” sector - including hedge funds - as he confirmed corporate governance is just “one of the many issues” being discussed by governments in response to the turmoil.

Tomlinson admitted to delegates the pension industry “could have done better”, but added there is no need for pension funds “to be defensive”, instead they “just need to acknowledge it is an issue and seek to improve it”.

He also warned against the practice of “rewriting history”, as he pointed out some decisions - such as the purchase of ABN Amro by the RBS consortium - “seemed a good deal at the time”.

“Everybody carries some responsibility for the financial crisis. Pension funds are one element but they’re down the list,” and although “we need to keep pushing corporate governance along”, Tomlinson suggested the industry should also think about what form the next crisis might take.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email

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