UK – The Accounting Standards Board says it stands by the FRS17 pension accounting standard – but admits critics could have a case.
“I think FRS17 is probably the best pension accounting standard in the world,” ASB technical director Andrew Lennard told IPE. “But that’s not to say it’s perfect.”
But as it’s was so new it was not “surprising that people are taking issue” with aspects of it.
He was responding to a report from SEI Investments which found that calculations based on proposed new discount rate would reduce pension deficits at FTSE 100 companies to zero. SEI says the ASB has used “flawed logic”.
“They certainly have a case,” Lennard said. But he added: “It’s not one I’d like to debate in the media. It needs to be debated at length.” SEI’s findings would “absolutely” be part of the debate on the standard going forward.
SEI argues that the ASB has made a mistake with “considerable ramifications”.
It says: “Pension calculations require a discount rate which is the annual rate at which projected future liabilities are discounted back to the present date. FRS17 requires the use of a discount rate equal to the yield on an AA-rated bond of equivalent term and currency to the liabilities.
“The research argues that the FRS17 prescription of a discount rate (based on AA-rated bond yields) is too low for the majority of UK companies and will lead to an over-estimation of the true pension deficit and an under-estimation of the surplus that is reflected in company accounts.
“The FRS17 prescription has arguably been a major contributory factor leading to the acceleration in scheme closures over the last four years. Flawed measurement creates distortions in decision making such as the allocation of corporate capital or whether to close a scheme to new or existing members.”
The findings are found in a paper - ‘The failings of FRS17 & and the impact of pensions on the UK stock market’ – that was written in conjunction with Laurence Copeland, Professor of Finance at the Cardiff Business School.
“FRS17 correctly specifies that a pension fund should be regarded as an integral part of the firm as a whole with assets and liabilities which belong on the company’s balance sheet,” said Andrew Slater, director of institutional strategy at SEI Investments.
“However, from this point on the logic of FRS17 falls apart by resting on a discount rate which is arbitrary and does not take into account the market-determined cost of capital for the sponsoring firm.”
Slater added: “The real problem with FRS17 goes beyond the technical details. Accounting has become the pursuit of precision at the expense of accuracy. Others have defended FRS17 as just the messenger but the problem is that the message it delivers is incorrect.”