UK standard brings in market values
In the UK, the Accountancy Standards Board is working on proposals as to how pension costs should be account-ed for in company accounts These could be in effect for accounting periods ending in 2001 and beyond.
Commenting on the discussion in the UK, consulting actuaries Lane Clark & Peacock says the outcome is a new accounting standard that will require assets to be valued at market value, in line with international standards.“This will improve consistency of reporting and make disclosure more straightforward,” they say in ‘Accounting for pensions costs’ , an annual report and survey of SSAP 24, the current UK pensions accountancy standard.
Switching to market values, as is being considered, may mean that pension costs will be volatile. To be consistent with a market value of assets, liabilities will be calculated by reference to market rates of discount. “If such rates fully reflect conditions at the date of valuation we will see a considerable mixture of assumptions as companies carry out their valuations at different dates. This will make comparisons difficult.”
The divergence between the assumptions schemes make and the actual outcome in any year will give rise to actuarial gains and losses, which can be substantial. “Earning an extra investment return of just 1% on a fund worth £10bn generates an actuarial gain of £10m.” If these gains are accounted for immediately through the profit and loss accounts, then pension costs would be very volatile, the report says.
If as an alternative, companies use the ‘Statement of total recognised gains and losses’, very large positive or negative items would be avoided, but it must be noted that schemes may not be able to keep pensions costs down by utilising any surpluses that emerge . “We remain convinced that, where a company, utilises surplus assets to provide improved benefits, it should not have to account immediately for the capital cost of the improvement. The appropriate treatment would be to net the cost off against any surplus as the improvements would surely not be granted if the surplus did not exist.”
But the actuaries warn that “we could see a new standard which represents the final nail in the coffin of defined benefit provision”. Companies which would not accept volatile pension costs would close down their schemes, or those who would have improved benefits out of surplus would choose not to, the actuaries argue, as a result of the change in accounting.
But leaving aside those concerns, the new standard could be a big im-provement on the current SSAP 24 “if only because disclosure will be improved”.
The survey, undertaken by Lane, Clark & Peacock among the FTSE 100 companies to ascertain how they are implementing SSAP24, shows that a handful of the top companies have improved their pension cost disclosure, but on the other hand, disclosure by a few companies remaind ‘almost impenetrable’ and the general standard is “too poor”.
Looking at the impact of the 1997 tax change which removed tax credits on UK dividends and cost UK pension funds up to £3bn a year, the report says that this increased cost is being deferred by changing actuarial assumptions. But the effects must show through at some point. The changes in assumptions leave schemes “with less margin” to cope with market changes amd this is on top of cost pressures from the minimum funding requirement, improving mortality and lower inflation and investment returns.