'Smoothed' accounting could help pensions woes
EUROPE - The introduction of ‘smoothing' on the accounting of pension fund asset valuations would significantly improve pension fund valuations and management without fundamentally changing the risks they need to manage, according to BlackRock Asset Management.
Andrew Dyson, head of institutional business EMEA at BlackRock, has suggested the requirement on pension funds to price market-to-market, as currently stipulated under International Accounting Standards 19 (IAS19), is distorting the apparent valuation of pension funds to such an extent the reported figures do not reflect what should be the long-term status of pension funds.
As a result, he suggests by smoothing the market-to-market pricing over up to five years, there would be more stability of the pricing and it would also place show pricing as being at a value closer to the long-term performance of the assets.
"Pension funds and risk-free mark-to-market bonds seemed to be the model way to value them. The problem is accounting standards show prices straight away. To hedge the liabilities we to buy index-linked gilts," said Dyson.
"[Accountants] say they are just measuring assets, but there is a link between price and behaviour. You can't create the framework and then not be responsible for the behaviour than ensues. It is very naïve to imagine that is not going to happen. If you have them operate in this framework and pension funds will still behave as though they have to realise all the assets this or next year. It will damage illiquidity premiums and cost money which is for the benefit of members.
He continued: "I see absolutely no reason why accounts could not be prepared based on smoothed values over 1, 3, 5 years. Accountants will claim that would be affecting information to investors. But you could provide the full disclosure in the back of accounts so anyone who wants to know can know. It will remove some of the behavioural biases that are distorting pricing."
Such a move would help Dutch pension funds, suggested Dyson, as it would no longer look pension funds look bad in terms of valuations at individualised and specific points in time but could show how assets actually perform when there is no need to buy or sell.
"I would love the International Accounting Standards [Board] to introduce this as it would make a huge difference to institutions around Europe. It could absolutely be applied to Dutch pensions systems, for example, and it would be a good way in time of tackling things without jeopardising the regulatory [requirements]," said Dyson.
More importantly, given the high volatility of those prices in recent months it makes sense to apply some form of ‘smoothing' over time to better reflect the true value of assets, rather than at points in time with a short-term price and focus," he added.
Dyson focused on the benefits to the Dutch market in particular because he consider the Netherlands pensions market to be "the most evolved regulatory market, even over the UK".
"There is a great shortage of people who have the money and can stay invested for the longer-term. But I'm afraid over the last few years one of the things that we have had to cope with accounting standards have made it hard to invest for the long-term. The change made at an earlier date was because they said ‘why would you let an actuary sit in judgment and decide what an asset was worth?' Surely what the judgment should be is ‘what would a willing buyer pay and a willing seller sell at?' But not all of the markets work with a willing buyer or seller," stressed Dyson.
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