Risk-free rate 'not appropriate'

UK companies have rejected the Accounting Standards Board suggestion that pension schemes be recorded in a way that could add billions of pounds to the pension liabilities on their balance sheets.

Companies have interpreted the ‘risk-free rate’ proposals from the standard setter as a suggestion to estimate pension assets according to that of UK government bonds, which would produce lower valuations of a pension fund.

Pension values recorded on balance sheets are calculated using safe AA corporate bond rates.

This week, scores of responses to the ASB indicated an unwillingness to take further hits to their books.

Michael Starkie, BP’s chief accounting officer, described the ‘risk-free rate’ proposal as ‘wholly inappropriate’ while the Department for Work and Pensions warned of ‘unintended consequences’.

‘They [the proposals] are detrimental to the perceptions of employers running defined benefit schemes and to those of their investors,’ said the DWP response. ‘We would like to highlight the counter-arguments and multiple likely behavioural effects ­ such as an increased focus on gilt-based strategies, a continuing trend towards buyouts, and ultimately a further move away from defined benefit pensions.’

Astra Zeneca CFO Simon Lowth opposed suggestions that financial performance reflected the actual return on assets, rather than the expected return. ‘The added volatility to the performance statement provides no additional benefit to users of financial statements,’ he said.