UK - The Chartered Institute of Management Accountants (CIMA) has warned pension accounting standards should not be "artificially engineered" to help keep defined benefit schemes open.

CIMA revealed in a summary of the main issues arising from the discussion paper published by the UK Accounting Standards Board (ASB) in January that it only disagreed with two of the main ASB proposals - to use only current salary levels to determine future pension obligations, and to use a 'risk-free' discount rate.

That said, CIMA admitted in the report "Reforming the reporting of pensions" it did not think the "complexities of pension provision" could be "adequately represented by a single number on the balance sheet".

The document - which summarised the main responses to the ASB consultation in addition to CIMA's own views - noted "there is not one right answer and the impact of reporting a wrong number could be catastrophic for pension provision".

CIMA revealed while it agreed with other proposals such as the removal of 'smoothing' mechanisms, and the use of actual returns on assets rather than expected returns in accounting statements, it added "further work should be undertaken into the possibility of using forecast cash flows derived from regulatory measures to determine pension liabilities".

The use of a risk-free discount rate was also rejected by CIMA for being "inconsistent" and instead suggested an alternative would be to "consider measuring pensions liabilities based on no increases in salaries or other factors, such as deferred rights, combined with using a real discount rate" to produce a consistent approach on inflation.

Despite its opposition to this proposal, which has been criticised by the industry for potentially increasing pension liabilities by anything up to £100bn (€112bn), CIMA said it "does not believe that pension standards should be artificially engineered to produce results that favour keeping schemes open, nor does it believe that the vast majority of those arguing against the ASB's proposals would approve of rules skewed in this way".

Barnett Waddingham has meanwhile warned the current accounting requirement to use a high quality corporate bond as a discount rate for valuing pension liabilities, could lead to improved funding levels by the end of the year, as the market turmoil has led to investors turning to less risky investments such as gilts, resulting in the highest corporate bond yields since 2002.
The actuarial consultants claimed the additional margin investors can earn above gilt yields is currently 2.7% pa for AA-rated bonds, compared to 1.3% pa at the start of 2008, and this increase combined with a fall in the expected rate of future inflation means schemes with a cautious investment approach could see an improvement in the funding level of 35%.

However Barnett Waddingham pointed out this "highlights the inconsistencies of an accounting standard which will be disclosing improved funding whilst employers are being put under pressure by trustees to pay additional funds into the pension scheme as a result of falls in asset values and/or a worsening of the strength of the employer's covenant".  

Paul Hubbold, actuary at Barnett Waddingham said: "Employers may be encouraged by their auditors to adopt more prudent assumptions than those simply implied by the corporate bond market or to be more selective in the bonds that they look at. Auditors may argue that the current accounting standards do not show a ‘true and fair view'.

"This may lead to a whole range of approaches being adopted which in turn will lead to inconsistent results across similar companies. This questions the validity of current accounting standards and may further strengthen the proposals that are under consideration regarding the use of a ‘risk free interest rate' to discount pension liabilities e.g. gilt yields," added Hubbold.

He warned the price of gilts is being kept artificially high by the lack of supply and increased demand, and suggested yields would only worsen if the ASB adopted the risk-free discount rate approach, prompting fresh claims of being "another 'final nail in the coffin'" for DB schemes.

Hubbold said: "The current standards no longer appear to achieve the purposes upon which they were first introduced. Perhaps it's time for accountants to give up on trying to define a long-term liability on a market-related short-term basis and go back to the old SSAP24 approach of a long-term best estimate?

"Companies need to be careful they are not overstating their funding positions and the accounting profession needs to determine how to place a fair value on long term pension liabilities on a company's balance sheet," he added.

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