UK - Proposed changes by the Accounting Standards Board to pension fund accounting create a discrepancy between the economic valuation of FTSE 100 schemes and those applied under accounting rules worth over £145bn (€181bn), according to figures presented by pensions consultancy firm Redington Partners.

Details of a study, conducted by the firm which advises pension schemes and insurance companies on strategies such as pensions buyouts, reveals while the aggregated pension schemes of the FTSE 100 have shifted from a £17bn deficit in March 2007 to a surplus of £21bn in March this year, the economic valuation of schemes when calculated according to the 30-year swap curve - rather than the AA discount rate - in fact widens the deficit of these schemes from £64bn to £124bn in March 2008.

Moreover, were the ASB proposals unveiled at the end of January introduced, the difference between the figures currently being used under IAS19 and the 30-year swap curve is £145bn, according to Redington Partners, indicating the actual value of pension schemes is significantly different to that currently displayed on corporate balance sheets.

That said, Robert Gardner, partner & co-principal at the firm, said he believes the move by the ASB to make these valuation changes is a good thing, as it should mean all stakeholders in a corporate pension, whether employer, member or shareholder, will be able to fully understand the true value of the pension fund.

"Pension trustees would be planning pensions liability funding on an economic basis while accounting rules require another basis. The gap between the two has tripled in the last year," said Gardner.

"The ASB is seeking greater disclosure of the key numbers used to value the assets and liabilities of a pension scheme. The problem is whereas firms all use the same process, even if they value assets on the same day they can come up with very different results for the liabilities, depending on the mortality assumptions, inflation and discount rates.

"A UK sponsor's concern would be most pension schemes are looking to get their schemes fully-funded to a buyout basis, and closer to an economic valuation basis. From the sponsor's perspective, this is a great free lunch: accounting for your pension scheme with a surplus is great, but if the credit spreads move the surplus could collapse. So it is a good thing the ASB is proposing these changes to greater transparency and a risk-free valuation basis.

"The overriding principle is any interested stakeholder should be looking at the pension scheme not on a single basis, such as accounting, but on a number of different basis, such as IAS19, economic - ie Libor - and gilts basis. If you don't know what your pension scheme looks like on these basis it's hard to work out an investment strategy which maximises the probability of reaching a given funding level through time," he added.

One of the interest developments to have surfaced within the last two years is the growth of pensions buyout firms, which have been talking to pension trustee boards and corporate sponsors about the possibility of buying out the liabilities - an area to which Redington dedicates a substantial amount of its time to when advising pension fund clients.

However, Redington has found in its investigations many the firms involved are not not necessarily interested in buying out the full liabilities of an immature scheme - one which has a high proportion of active and deferred members - but in the pensioner members or mature schemes with a high proportion of pensioners.

It is harder to manage the economic value of the longer-dated liabilities, said Gardner, because 70-80% if the risk within immature schemes tends to come from the remaining active and deferred members, rather than the pensioners.

"A lot of annuity providers are aggressively pricing pensioner liability profiles because of the higher yielding corporate bonds in which they can invest, or to win market share," continued Gardner.

"Many buyout firms will bid for full liability buyout, but only when the majority of members are pensioners. If the ratio of active and deferred members is high, they are less likely to buy out that liability, but be selective and offer to buy out the pensioners over the age of 70."

Gardner suggests buyout premiums, relative to IAS19, can range from 100% to 110% for pensioners but stretch to up to 135% for deferred members.

"The increased premium is a result of the risky nature of deferred liabilities relative to pensioners and the lack of long-dated bonds to match these liabilities, which means managing these risks requires the use of more sophisticated investment techniques such as using interest rata and inflation swaps," he added.