Recent research has suggested that RBS and Lloyds are under-estimating pension obligations in their accounts by in excess of £24Bn combined. The survey by AlphaValue suggests that both organisations are using too high a discount rate in their accounting disclosures which reduces the value of the pension liabilities and therefore the scheme deficits. We’ve written extensively in this blog about issues surrounding pension scheme disclosures (“Pension Accounting Standards – Stop snickering at the back“, “Pension Accounting Standards – An Evertonian speaks“) but this research does at least highlight a few important issues.
Firstly, at long last how pension liabilities are valued in accounts is being recognised by analysts as being very significant and capable of distorting a company’s financial position and should be looked at closely, and frequently with some scepticism.
Secondly, this is an issue not just for the very largest companies but for any company disclosing pension liabilities in their accounts.
Thirdly, the position for companies going forward is going to be very problematic. AA Corporate Bond yields were up around the 6.6%-6.7% level at the end of 2008 meaning that companies could justify discount rates at around that level. They are now down around 5.6% which means that discount rates reflecting this could see liabilities rise by in the region of 15%-25%. The likelihood therefore is that companies will need to deal with increased deficits being disclosed in their accounts with the numerous associated issues.
Yet again this is an area where you need to look closely at the figures to see what they really mean and who is likely to be affected.