O'Brien warns ASB plans may 'hasten' DB closures
UK - Mike O'Brien, the UK minister for pensions reform, has expressed concerns that the changes to financial reporting of pensions proposed by the Accounting Standards Board (ASB) could "hasten" the closure of defined benefit (DB) schemes.
Earlier this month, the department for work and pensions (DWP) confirmed the government intended to make representations to the ASB over concerns within the industry that proposals to switch the discount rate from a corporate bond to 'risk-free' government gilts would significantly increase pension liabilities. (See earlier IPE article: DWP to discuss reporting concerns with ASB)
Other proposals put forward earlier this year by the ASB suggested changes in pension assets and liabilities should be reported as they happen rather than spread into the future, and argued financial statements should reflect the actual return on assets instead of estimates.
However, industry responses to the discussion paper claimed the change to the discount rate could add between £80-120bn to (€101-152bn) to company pension scheme liabilities, with the National Association of Pension Funds (NAPF) arguing the change would "further weaken and erode UK DB pension schemes". (See earlier IPE articles: ASB changes will "fast-forward" demise of defined benefits and ASB given 'swap' alternative to 'risk free' discount rate)
The consultation closed to response on July 14 2008, however the DWP confirmed O'Brien had submitted a letter to the ASB in which he expressed his concerns that the proposals could "hasten the closure" of DB schemes as it would be yet another contributory factor added to the various pressures already on employers funding DB schemes.
Bernard Potter, former treasurer of the Occupational Pensioners' Alliance (OPA), said the organisation's response - on behalf of members of DB, career average and defined contribution (DC) schemes - was based on the "basic tenets of accounting principles - realism and prudence".
In a letter, Potter claimed in response to "anything resembling tighter control, and more accurate reporting" industry organisations, such as the NAPF, tend to resort to the "statement trundled out at every opportunity that 'this move will hasten the end of DB pension schemes'".
He admitted a downward trend in DB schemes is "undeniable" following increased longevity and clearer identification of costs and liabilities, however he claimed "adopting valuation and reporting methods that hide or reduce the true extent of company liabilities is clearly not the answer".
One of the other ASB proposals objected to by organisations such as the NAPF and the European Federation for Retirement Provision (EFRP) was the use of actual returns rather than estimated returns on investments in companies' income statements.
But Potter pointed out "when actual returns are available, what possible justification could there be for the use of estimated returns?"
Instead, he argued: "The basis of all pension reporting should be a realistic valuation of the individual scheme - Scheme Specific Valuation. If this is performed effectively, prudently and realistically, this will automatically provide the best basis for pension scheme and company reporting."
The ASB confirmed it has received over 90 responses prior to the closure of the consultation and said the level of responses meant it believed the paper "has achieved its first objective of stimulating debate".
The organisation added it would spend time considering the responses and would also discuss the matters raised with interested parties, although it admitted the "redeliberation" of the proposals is not expected to start until September 2008.
Ian Mackintosh, chairman of the ASB, said: "The responses contain a variety of points of view and will be a wonderful basis for redeliberating the original paper. We now need to consider the responses carefully to ensure the aim to develop sound proposals for the international community is fulfilled."
As a result, the ASB admitted the report setting out final recommendations for consideration by the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) "is not anticipated until the second half of 2009".
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