Watson Wyatt says FRS17 nullifies equity rise

UK – The FRS17 pension accounting standard has cancelled out stock market rises, says consulting firm Watson Wyatt.

“For pension schemes, the recovery in equities over the past year has been largely cancelled out by increases in liabilities,” the firm said in a release, adding that the overall deficit for UK pension funds under FRS17 was “little changed from a year ago” at 60 billion pounds (euros).

And it warned that the deficit for all UK schemes “could be as much as double this figure” and called the standard a “highly volatile indicator”.

“While a rising stock market has been positive, the liabilities of pension schemes have increased because of higher inflation expectations and lower corporate bond yields,” said Watson partner Robert Hails.

“The stock market recovery was clearly welcome but rising liabilities mean it has done little to eat into these accounting deficits.”

The firm said that higher inflation expectations as implied by the UK government bond, or gilt, market up from 2.25% to 2.75% - raise liabilities as they increase the expected payouts from pension schemes.

Yet at the same time, lower corporate bond yields - down by 0.25% - increase the net present value of the payouts.

“The accounting standard FRS17 is a highly volatile indicator of a pension fund’s position,” Watson said, noting that it does not affect the contributions that companies have to pay into their schemes.

“A further alternative way to view pension scheme funding positions is the shortfall that would be required to be made up by employers if they closed the scheme down today and secured the benefits via annuity purchases - the “buy-out position”. Watson Wyatt estimates the buy-out deficit for FTSE100 companies at 150 billion pounds.