The UK's National Association of Pension Funds (NAPF) says the Accounting Standards Board's (ASB) proposals for pension costs accounting must be rejected because they would fail to give a true picture of long-term pension costs to companies.
The ASB's proposals for using market pricing of assets to calculate pension costs would produce volatility in the annual costs shown in companies' re-ported figures, says the association, while accepting that the current system, - SSAP24 - is seriously flawed".
In a response to the ASB, the association points out that the actual cost of pension benefits accrued in any one year depends on long-term factors, such as price and pay inflation and real investment returns over 30 to 40 years. "Therefore we would not expect the pension costs recorded in a company's accounts to fluctuate significantly from year to year unless significant changes in employee numbers or remuneration occurred in that company as a result of management decision or changes were made in the taxation of pension funds," it says.
It adds that any accounting standard which "produces significant volatility on its own account and is not an appropriate instrument for measuring pension costs".
The NAPF has concerns that volatility in reported profits arising from an inappropriate accounting standard would be misleading and confusing for invest-ors, and so defeat one of the main purposes of improved accounting standards. The fundamental flaw in the ASB proposals is that "they weld together two very different and incompatible models for valuation and pricing". The first is designed to capture the best estimate of future risks and rewards to produce a figure for an annual regular contribution, says the NAPF. The other "merely provides a snapshot of market prices on a given day". They are incompatible and likely to give unsatisfactory results if used together.
It argues that a consistent approach must be adopted to towards both liabilities and assets. "A suitable method of valuing equities and a method of more accurately determining the equity risk premium should be the subject of further study before a 'norm' is adopted."
The NAPF says it would only accept the use of market prices to measure pension scheme assets if an acceptable method of estimating the value of liabilities can be found, provided this is consistent with the values placed on the assets. But it does not agree that using the rate of return on matching assets to discount the pensions liability is a practical method of estimating the value of liabilities."