World's largest car manufacturer faces investigation
Investigations into the pension liabilities of General Motors by the SEC have
raised concerns that the UK pensions accounting regime is vulnerable to similar
The SEC subpoenaed GM, the world’s largest car manufacturer, after claims
that the company had used inflated valuations to boost its earnings. GM
allegedly inflated valuations for the pension assets of car parts subsidiary
Delphi – a company that was declared bankrupt last month after spinning off from
GM in 1999.
It is suspected that the overblown valuations and earnings increases were
made at the same time that executive share options came up for collection. GM is
also alleged to have excluded extended healthcare obligations, which would have
increased its pension deficit from $31bn (£17.5bn) to $70bn.
Jerome Melcer, actuarial director at BDO Stoy Hayward, said the GM
investigation highlighted possible threats to the UK pension system, as local
accounting standards did not spell out how asset growth assumptions should be
‘FRS17 and IAS19 specifically define how a pension liability should be
discounted. But the standards do not tie down how growth assumptions should be
made,’ Melcer said.
According to Melcer, US companies were more aggressive in their assumptions
by basing valuations on equity returns in excess of 10% per annum, as opposed to
the more sober 7% to 8% forecasts used by FTSE350 groups.
Melcer suggested that, once the SEC had completed its probe into GM and
DaimlerChrysler, which was also subpoenaed last week, scrutiny could be placed
on the auditing profession.
‘As the watchdog of the accounts, the auditor needs to ensure that the
figures reflect the value of the assets, but pension liabilities are actuarial
tasks rather than audit,’ Melcer said.
‘Auditors cannot always assess what is going into the profit and loss account
and balance sheet without help from actuaries.’