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“Pragmatic” pensions accounting for UK banks

UK – Financial services firms in the UK are to be subject to “pragmatic” pension accounting rules in a bid to save millions of pounds in compliance costs, according to a consultation document from the Financial Services Authority.

It said: “There is not obvious right answer to the issue of the regulatory treatment of pension liabilities in the UK.”

“We propose a significant departure from the accounting requirements in respect of accounting for defined benefits pension schemes,” the FSA said in a paper on the planned implementation of International Financial Accounting Standards.

It has put forward a capital treatment for pensions to operate for at least two years to allow the accounting issues to “settle down”.

“The objective is to provide a simple and readily-understood approach that recognises that pension arrangements differ widely and so the liabilities will be met differently.”

The FSA said that the issue of accounting for DB schemes affects most large banking and insurance companies that it regulates – and that including pension liabilities in the calculation of regulatory capital would cut capital by around nine percent on average.

It estimates an annual cost of around 500 million pounds to service this across the sector. It says its proposed plan would “very approximately” halve this cost.

“The proposals present a pragmatic approach to that involves the least disruption to firms meeting FSA requirements,” the authority said.

It said the proposed changes arise from the application of the IASB and UK accounting standards measuring financial instruments and accounting for pension costs.

“There is still uncertainty about how these standards will apply in the EU from January 1 2005.” This means that there is no reliable information on the number of UK institutions that will be using IASs, the FSA added.

“We do not know how they will apply the options under the standards or the effect that applying these options will have on capital.”

Its proposals are “short-term solutions that meet our statutory objectives of maintaining market confidence and protecting consumers”.

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