Accounting rules mask £75bn pension deficit

Accounting methods and falling bond yields will give shareholders a nasty shock when they see companies' pension libiliites have increased by 25% over the past six months.

During the financial crisis higher yields on corporate bonds, which are used to calculate pension liabilities on an accounting basisi, resulted in improved funding positions. But in the last six months falling bond yields will see liabilites grow by 25%, despite assets rising by 20% in the same period, finds PwC.

The firm explains that the fall in bonds is pushing convergence between liabilities reported on a scheme funding basis and under accounting rules.

“Some will be shocked to find their accounting deficits have increased because liabilities have increased faster than assets as a result of falling bond yields,” said PwC partner Brian Peters.

Pension liabilities for the FTSE 100 could total £75bn in end of year accounts.
“As the investor community makes its decisions based on the accounting numbers, we could see their shock reflected in share prices as these figures grow as a result of falling bond yields. Companies need to anticipate this and consider the extent to which their investors will have factored these issues into their valuation,” added Peters.

Further reading:

Pensions Risk Management: Snooze you lose - convincing trustees to take the risk out of pensions