NAPF: Accounting proposals could lead to further erosion of UK defined benefit pension schemes

In its response1 to the Accounting Standards Board’s (ASB) proposals2 in their Financial Reporting of Pensions discussion paper, the National Association of Pension Funds (NAPF) has today warned that the plans are likely to further weaken and erode UK defined benefit (DB) pension schemes.

Analysis by actuarial consultancy, Punter Southall3, on behalf of the NAPF, shows the ASB’s proposals for measuring liabilities would double reported liabilities for young pension4 schemes and increase them by 60% and 25% for medium4 and mature4 schemes respectively.

The NAPF has also has raised its objections to:-

using actual returns rather than estimated returns in companies’ Income Statements;
employers providing pensions via multi-employer schemes being required to account for pensions in the same way as those using single employer schemes;
pension schemes having to show liabilities as well as assets in their full accounts.

Joanne Segars, NAPF Chief Executive, said: “These proposals are likely to further erode and weaken defined benefit provision in the UK, increasing reported scheme liabilities and undermining scheme sponsors’ willingness to provide these types of pensions. It is the practical effect that is at the heart of our concerns.

“Like other regulators and standard setters, the ASB cannot operate in a vacuum, indifferent to the consequences of their actions.

“Instead it must offer a ‘real world’ solution to the issue of accounting for pensions that, on the one hand, takes account of the need for transparency, and on the other the need to maintain good quality defined benefit pensions that provide valuable retirement income to millions of working people.”

“The ASB should revise its proposals, especially those relating to the use of a risk-free discount rate which will increase reported defined benefit scheme liabilities.”

On 31st January 2008, the ASB, issued a discussion paper and proposals on the Financial Reporting of Pensions. The results of the ASB consultation will then be submitted to the International Accounting Standards Board (IASB).

The NAPF has raised specific concerns about many of the proposals made by the ASB:-

Risk-free discount rate

The ASB proposes changing how pension liabilities are measured by adopting a risk-free discount rate (for example, gilts) rather than the existing corporate bond rate. This could increase reported liabilities by 100% for a young scheme, 60% for a medium scheme and for a mature scheme by 25%.

While it is clear that using the current AA corporate bond rate to discount pension liabilities is not ideal, the NAPF believes that it should either be retained or replaced by a swaps rate plus 1-2 percentage points.

Actual rather than expected returns

The ASB wants pension funds to use actual rather than expected returns in their Income Statement. Using actual returns will overstate the volatility of long-term pension costs whereas, in reality, the underlying cash flows are essentially stable from one year to the next.

Including pension liabilities in pension scheme accounts

The ASB proposes that pension schemes should report both assets and liabilities, when at present only assets are reported. The NAPF believes that this proposal reflects a misunderstanding of the nature and purpose of the scheme accounts, which are not general purpose financial statements but a statement of assets and transactions for stewardship purposes.

Requiring employers to measure multi-employer schemes in the same way as single-employer schemes

The NAPF does not agree that employers providing pensions via multi-employer schemes should be required to account for pensions in the same way as those using single-employer schemes. In many cases, the existence of fully risk shared arrangements makes this impossible, while in other cases past and current practice makes it impossible to apportion liabilities between each employer.

The NAPF does agree with the ASB proposal that discretionary future salary increases should be excluded from the calculation of scheme liabilities. These are not liabilities at the balance sheet date.


ENDS

Notes to Editors

1. The NAPF response can be found at http://www.napf.co.uk/policy/recentreports.cfm

2. The ASB Discussion Paper, ‘The Financial Reporting of Pensions’ can be found at http://www.frc.org.uk/asb/press/pub1513.html

3. Details about Punter Southall can be found at http://www.puntersouthall.com/

4. Young schemes –one with a duration of 29 years;
Medium scheme – one with a duration of 20 years;
Mature scheme – one with a duration of 12 years.


The National Association of Pension Funds Limited

The NAPF is the leading voice of workplace pension provision in the UK. The NAPF represents over 2000 workplace pension schemes providing pensions for over 10 million working people. Our member schemes hold assets of around £800 billion and account for approximately one fifth of investment in the UK stock market.

Further Information

NAPF

Journalists requiring further information please contact Mark Brooks via 020 7808 1312/07917 506683
mark.brooks@napf.co.uk

Punter Southall

Journalists requiring further information please contact

Sarah Caddy / Andre Flemmings
020 7786 4819/020 7786 4811