UK – Under the new accounting standard FRS17, the UK’s largest defined benefit pension schemes had an aggregate deficit of some £25bn (€40bn) in July on a corresponding asset base of £200bn, according to a new report by the consultants Lane Clark & Peacock (LCP).
LCP says the same survey taken a year ago, before the introduction of FRS17, would have shown an aggregate surplus for the companies, which form the FTSE 100 index.
LCP believes schemes that are larger than the company they represent and that invest heavily in equities will suffer the most. Moreover, FRS17 will create balance sheet volatility even for schemes that show a surplus under the new accounting practice.
But LCP says too much attention is given to whether a not a scheme is in surplus or deficit under FRS17. Alex Waite, a partner at LCP, says FRS17 figures cannot simply be taken at face value and shareholders need to deepen their understanding of pensions if they are to see the true position of their scheme.
“The inherent volatility of the new standard for pension schemes that invest in equities means that schemes may regularly lurch from large a FRS17 surplus to significant deficit. We must not become overly concerned when we see these very volatile accounting numbers – they may mean very little in the real world,” he comments.
Nonetheless, LCP welcomes the attempts to harmonise international accounting standards in 2005 and anticipates the full implementation of FRS17 to be deferred. “From 2005, UK companies will be required to account under rules laid down by the IASB, rather than UK standards, so forcibly implementing FRS17 fir two years doesn’t make much sense,” says Waite.