UK – New pension accounting rules could improve earnings at almost a third of large UK companies, according to new research from Citigroup.

It said there’s been a lot of attention on the balance sheet implications of pension scheme deficit recognition under new International Financial Reporting Standards. But there had been “far less focus on understanding the impact on earnings of the shift to an on-balance sheet accounting model”.

It said in a research note: “In many circumstances due to the fact that certain pension losses can be taken to equity on transition to IFRS, this earnings number may well increase.

“Our 2003 data (which is the latest available for many companies) shows that this will happen for c.32% of our sample.”

Reed Elsevier, British Airways, Reuters and Capita would see their earnings boosted while losers would include Rolls Royce, Daily Mail & General Trust and Hanson.

Citigroup said its view is that “enhanced returns in 2004 will reduce the pension cost for even more companies as larger expected returns on plan assets are reported as income in the balance sheet”.

The research argues that the balance sheet impact of the new rules is already “priced in” by the market – but that the earnings impact has been neglected.

Citigroup said the new rules would mean that pensions costs would be on average higher.

“Despite this rise in costs over 32% of companies in our sample will report higher earnings by virtue of the move to economic status accounting for pension schemes.

“For those reporting increases in earnings the average effect will be a four percent increase in net income.” For firms reporting a fall in earnings the median decrease would be five percent.