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AIA

ASB proposes pensions shake-up

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31st Jan 2008
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In a discussion paper released today the Accounting Standards Board (ASB) set out a series of proposals that could significantly change the financial reporting of UK pensions.

In a move that will increase the size of firms’ pension liabilities, the ASB proposes that liabilities should be calculated using a “risk-free” rates of return rather than the returns that could be expected from corporate bonds or other AA-rated securities. Britian’s pension funds have seen the value of their pension liabilities fall ever since the credit crunch triggered a slump in AA-rated investments, leading in some cases to a surplus that critics have argued is only an accounting change that does not reflect reality.

“This could add up to 20% or more to the pension liabilities recorded in a company's accounts,” complained Charles Cowling, managing director of Pension Capital Strategies.

Nor is this the only suggestion that will worry boardrooms. Also significant, but of less immediate impact, is the proposal that the current treatment of including the expected return on pension assets in a company’s profits should be replaced with actual return. As well as affecting reported profits, this may induce companies to de-risk and switch pension schemes from equities and into bonds.

The paper goes on to outline the case for dropping the use of the long-term assumption in valuing pension assets and liabilities, and argues that assets and exposures should be stated in the period in which why arise.

John Broome Saunders, actuarial director of BDO Stoy Hayward Investment Management, told the press the proposals were “a real kick in the teeth” for forms with defined benefit schemes.

The paper is European in its scope and origins, being a collaborative effort between the ASB, the European Financial Advisory reporting Group (EFRAG) and Pro-Active Accounting Activities in Europe (PAAinE). It can be read in full here and comments on the issue must be submitted to the ASB by 14 July 2008.

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