Pension Accounting Standards – Stop Snickering at the back!

Neil Copeland

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I see from an article in the Financial Times that something called the Marathon Club is quoted as being critical of the International Accounting Standard 19 (IAS19). The Club suggests IAS19 is responsible for the closure of Final Salary pension schemes as a result of its impact on Company accounts.

Being a child of the 70’s, and not the athletic type, the Club’s name initially conjured up images of people meeting in a darkened room, to indulge a slightly sinister craving for that chocolate and nut based snack bar better known to younger generations as Snickers. I guess they are trying to convey the message that pensions are about the long run, a bit obvious as names go, but better than a pretend word that sounds a bit like something worthy with a few extra letters thrown in – you know who you are Entegria/Xafinity/Dyspepsia.

Anyway, I agree that linking pension liabilities to AA corporate bond yields doesn’t make a lot of sense, per se, but then they go off in completely the wrong direction.

According to FT.com, “The Marathon Club is calling for accounting measures that allow assets to be measured at “fair” long-term values and liabilities to be calculated as the net present value of future benefit commitments and other outgoings discounted at a rate “consistent” with the valuation of the assets.”

The Marathon Club appears to be suggesting that your pension liabilities are somehow linked to how you invest your scheme assets, a view that I thought had long been recognised as fatally flawed. Trustees and employers faced with funding pension scheme liabilities won’t see their real liabilities, or the real cost to the employer, magically reduce because the employer puts a smaller number in its accounts.

Let’s be honest, the actual numbers in pension disclosures in a company’s accounts don’t really matter when it comes to the real world and actually funding pension schemes – apart from to Aon and its procession of “biggest one day increase/fall (delete as applicable) in pension deficits” press releases.

I actually think the Pensions Regulator, in its recent statement on scheme funding, re-emphasises that we have a flexible funding framework within which to work when valuing pension scheme liabilities. The statement encourages trustees and employers to recognise and measure their pension liabilities on a prudent basis but allows flexibility, including the ability to make allowance for the schemes investment strategy, when assessing the contributions required to fund any deficit.

I don’t think employers should be more or less prudent than trustees when recognising their pension liabilities. Nonetheless there is an argument, in accounting terms, for something that FRS17/IAS19 delivered, in however flawed a fashion, which is consistency of reporting. Allowing employers to set their own assumptions for accounting purposes, and potentially fudge the position, is a retrograde step. So, inevitably, the flexibility available when considering funding needs to be curtailed. I do think there is scope for a debate about how and where such liabilities are disclosed in an employer’s accounts, rather than just what the number should be. There is big challenge here for the IASB to deliver a reformed accounting standard.

Finally, FRS17 (and therefore IAS19) should be thanked for one, unintended, consequence. It had the effect, in its early days, of forcing employers and trustees to recognise, in many cases for the first time, the real nature and extent of their pension liabilities and the associated risk and uncertainty. It is this aspect of the FRS17 story, people finally beginning to wake up to the true nature and extent of their pension liabilities, rather than a set of unpalatable numbers in their accounts, that has caused many employers to close their final salary pension schemes. As I have commented previously there is no point in persevering with an unsustainable pension framework and we need a meaningful debate about how UK plc meets the challenge of providing adequate income for its citizens in retirement.

Neil Copeland

Post by Neil Copeland

Director, pensions consultant and adviser to trustees and employers on all aspects of work based pension schemes.