UK - Proposals by the Accounting Standards Board (ASB) to recognise actuarial gains and losses on a company's profit and loss account would make the content of the reports "misleading", Mercer has claimed.

The consultancy firm said while it supports the "immediate recognition" of actuarial gains and losses for the pension fund on a company's balance sheet, to include the figures on the profit and loss statement would be "impractical".

The ASB issued a consultation paper in January which is designed to influence proposals by the International Accounting Standards Board (IASB) for review of the existing pensions acocunting.

This paper from the ASB included proposals which said companies should:

report pension changes as they happen; reflect actual returns on assets rather than estimates, and switch to a 'risk-free' discount rate in calculating liabilities. (See earlier article: ASB calls for fundamental accounting review)

However, while the majority of concerns about the proposals have focused on changes to the discount rate, with some organisations suggesting they should replace it with a swap rate, (See earlier article: ASB given 'swap' alternative to 'risk free' discount rate) Mercer said this would create potential problems in how employers report pension funds on their financial statements.

The consulting firm has questioned the feasibility of the discussion paper, 'The Financial Reporting of Pensions', as it claimed investors assess the value of a company as a multiple of earnings.

It argued applying a typical multiplier to the decline in pension assets already seen in the first six months of 2008 implies pension assets will fall past zero and become large and negative.

Phil Turner, chairman of the global accounting group at Mercer, said: "This is clearly not possible. The discussion paper is impractical.

"The existing approach to presenting pension expense is perfectly reasonable until the current financial statement presentation project is complete, and we can then make an informed analysis of how pension gains and losses relate to other items in the new income statement," he added.

The ASB proposals have been criticised by a large part of the pensions industry for "fast-forwarding" the demise of defined benefit (DB) schemes, amid claims the change in discount rate from a corporate bond to a government gilt rate would increase pension liabilities by up to £120bn (€152bn) (See earlier article: Aon warns of surplus shift to £180bn deficit)

In its response to the consultation, Mercer said it believed the need of investors to compare pension liabilities of companies on a similar basis "trumps any theoretical argument for reflecting the individual strength of companies in discount rates".
Turner said: "Given the variety of funded and unfunded plans to which global accounting standards apply, the current basis for the discount rate, AA-rated corporate bond yields, is a reasonable basis for discounting pension debt. Though there are practical problems with using AA-rated bonds, the argument for moving away from this measure is not compelling."

As a result of similar concerns, including those from the National Association of Pension Funds (NAPF), the UK government confirmed earlier this month it intended to "make representations" to the ASB over its proposals in an attempt to "encourage a balanced response" that pays attention to these concerns. (See earlier article: DWP to discuss reporting concerns with ASB)

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