The recent paper from the UK Accounting Standards Board (ASB) was described by Aon Consulting as “another dagger in the side of final salary pensions”. But when is a dagger not a dagger? Apparently, when an organisation or even an individual does something to draw attention to the increasingly unsustainable situation facing many defined benefit pension plans.

The distinction appears to turn on the difference between an act and an omission. So a discussion paper from a standard setter amounts to a ‘dagger’, while the heads-in-sand approach of trades unions to the longevity question falls into an entirely different category - body armour against a stab of reality, perhaps?

The ASB published ‘The Financial Reporting of Pensions’ in January to stimulate debate and influence the IASB’s existing pensions accounting project. At a meeting of the Analysts’ Representative Group on 13 February, IASB chairman Sir David Tweedie made it clear that the board would investigate ways to incorporate the ASB paper’s thinking into their own pensions project (probably as part of the IASB’s planned discussion paper on pensions accounting).

The ASB makes two key proposals:

A risk-free discount rate when measuring the liability, which would obviously make it look much bigger than the current AA corporate bond discount rate; and A proposal that companies should be booking the actual return on the pension fund rather than the expected return.

The implication of this second proposal is that it will produce greater volatility.

Peter Elwin, head of accounting and valuation research at Cazenove, says: “It is just putting pensions to the front of people’s mind and giving them a sense of some of the assumptions that drive the numbers and whether those assumptions are right.”

Noticeably, the paper does not fall back on projected unit credit accounting; it sits on the fence by leaning towards the US GAAP approach of the accumulated benefit obligation - no account of future salary increases.

This might constitute a signal to management to proactively manage their deficit; conversely, it might produce the opposite result with management free to ignore the value of the promises they make.

For a business tired of managing risk and uncertain GAAP, the buy-out route might look like an attractive option. Charles Rodgers of consultants Watson Wyatt agrees: “The opportunity to take risk off the table will start to look a lot more attractive when you are only paying a 5-10% premium compared with the 30%+ at present. That and potentially increased capacity will all make that de-risking much more attractive.”

The ASB report favours a risk-free rate as an alternative to the AA-corporate bond discount rate, suggesting a lack of viable alternatives. “The actuarial view is still focused very much on budgeting rather than on arriving at a present value on the balance sheet,” says Elwin. “They are trying to say what a company would have to do in cash-flow terms over the next 20 years. So the actuaries haven’t really provid-ed any help in terms of the discount rate for accounting purposes.”

Despite this, he continues: “in terms of actuarial firms and their view of accounting, there is now much more of a swing towards the view of ‘if you want to account for it this way, then fair enough’. My feeling is that we are a long way from the days of actuaries saying that such and such a method is simply the wrong way to account for a pension commitment.”

Another report, ‘An Unreal Number; How Company Pension Accounting Fosters an Illusion of Certainty’, published by the Pensions Institute at the Cass Business School, London, argues from the starting point that a single timepoint estimate in a set of accounts fails to account for a wide range of possible future outcomes in the overall funding position of scheme.

The report calls for the development of new tools, such as fan charts, to enable companies to represent the range of probabilities that surround pension obligations.

This is all very much blue-skies thinking. It certainly hints at an additional disclosure, rather than a single accounting measure, if only because the problem with representing a range of estimates in a balance sheet is that it would pretty much fail to balance. In the longer term, it hints at the world of accountancy post-XBRL.