PENSIONS SPECIAL - The end of the fudge is nigh.

It is the tumultuous departing fanfare that Accounting Standards Board supremo Sir David Tweedie will have hoped for.

Sir David leaves for the grander stage of global standard-setting next year but his last year at the top of the UK board saw him send several sacred cows to the slaughter.

The accounting treatment of leased assets and the rules governing the treatment of share options have both come within his sights.

But, perhaps most controversially of all, Sir David has also sought to radically reform the way defined benefits pension schemes are recorded in company accounts. This is no arcane matter. If approved many of the UK’s largest companies fear it will generate financial volatility on an unprecedented scale.

The ASB is currently sifting through responses to its proposed changes.

And it shows no signs of backing down.

Over the past 12 years – the period the existing SSAP 24 has been in existence – businesses have failed to disclose enough information on pension accounting to satisfy Sir David.

When the ASB published its first discussion paper in April 1995 to examine issues involved in accounting for pension costs, it met with determined opposition from the business world to change the existing approach based on actuarial assumptions to the idea of SSAP 24.

The ASB was unable to convince companies of the merits of change.

Since then, however, the International Accounting Standards Committee has managed to gain a consensus to move forward with the market value approach in its revised standard on pension cost accounting, IAS 19.

This victory persuaded the ASB to take another shot. With its second discussion paper the ASB received a slightly more positive response from industry to pensions accounting changes accepting a shift to a market values-based approach.

The upshot is this year’s exposure draft – FRED 20 ‘Retirement Benefits’.

It requires scheme assets to be measured at market value on the balance sheet date rather than at an actuarial value.

Scheme liabilities meanwhile must be discounted at the current rate of return on a long-term corporate bond rate.

Actuarial gains and losses are to be recognised immediately in the statement of total recognised gains and losses – known as STRGL to most FDs – rather than spread forward in the profit and loss account, resulting in the surplus or deficit in the scheme being shown on the balance sheet.

By forcing companies to show surpluses and deficits on the balance sheet and operating costs in the profit and loss account, business leaders say the new requirements will result in massive fluctuations.

There is still a great deal of debate surrounding these issues, but many actuaries believe concerns are exaggerated. In a bid to allay fears, KPMG worked with several clients calculating past results using the old and new methods.

‘It could be that the surpluses and deficits are not as large as many companies expect,’ says Trevor Crowter, an actuary with the firm. ‘We found that despite a slight increase in volatility in the profit and loss account, there were few significant differences.’

Companies prefer the actuarial assumption method because it is much smoother in that it takes a long-term view, usually spreading costs over 10 to 20 years, and therefore eschewing any volatility caused by markets.

But, the ASB argues, it does not reflect a company’s true standing and is therefore less than useful to shareholders, analysts and investors.

FRED 20 will make recognition immediate.

On the introduction of FRED 20, Sir David, soon to be chairman of the IASC board, said: ‘SSAP 24 has lost all credibility. We are replacing it with an approach that is consistent with international standards in the measurement of the pension scheme surplus or deficit and takes a step forward on immediate recognition.’

His hostility to SSAP24has not dimmed. ‘The real aim of FRED 20 is to see if a company is in deficit or surplus,’ Sir David continues to argue.

‘We’re trying to give a clear view of the profit and loss account. Accounting is quite simple really, so show it as it is. We don’t want massaging of numbers to some sort of fudge.’

And he makes no apology for the fact that he has gone further than the international rule. ‘This is what I suspect the IASC would have liked to do if it had had longer to develop its standard. The result of the proposals will be pension figures in accounts that do not disguise the significant yet uncertain influences that a pension scheme may have on a company.

‘For the first time a company’s pension surplus or deficit will be shown on the balance sheet rather than being represented by a number bearing no relation to reality and which is difficult, if not impossible, for the analyst to unpick as a starting point for any serious evaluation of the financial position.

‘No-one pretends that final pay pensions are easy to represent in accounts.

‘But understanding is not eased by locking all the numbers in a black box and then losing the key.’

However, insiders are dubious about the pace of change. If he has his way, Sir David will preside over the implementation of FRED 20 before the end of year and his chairmanship has ended.

It is, nonetheless, ultimately an ASB board decision over which Sir David has little sway. Either way, it is understood that if and when FRED 20 becomes a standard, there will be a long implementation process because of the confusion that is expected to reign.

It’s not just industry that is concerned. One pensions accounting expert comments ‘There is a lot of uncertainty over whether analysts will understand the figures in the balance sheet. It’s going to confuse everyone at first.’

But Allan Cook, ASB technical advisor refutes the volatility prediction.

‘We think we’re giving clearer information and they (users) will be able to use information and make better judgements and see the level of risks.’

‘Users like it, may I say,’ assures Sir David who together with his team at the ASB is sifting through the responses to FRED 20. ‘There has been a lot of support for the general thrust of the standard.

‘One major comment is to keep volatility out of the p&l account. That is exactly what we are trying to do. In fact, FRED 20 is less volatile than the US standard.’

There is considerable evidence of the need to change. Actuarial firm, Lane Clark & Peacock, released its seventh annual survey on FTSE 100 companies’ levels of disclosure on accounting for pensions earlier this year.

Its survey showed that over one in three FTSE companies fail to disclose what they deemed to be sufficient information of pension schemes resulting in confusion for investors and users.

Richard Abramson, partner in charge of this year’s survey, laments the advent of FRED 20, but says: ‘Despite improvements of disclosure, this is simply not good enough.’

Royal & Sun Alliance, WPP, Woolwich, Royal Bank of Scotland, Scottish Power, Unilever, Vodafone, Sema, CGU and ICI are among the companies that scored below the firm’s accepted score.

Legal & General, the insurance giant, scored top marks in this year’s survey. Adrian Boylding, pensions strategy director at L&G told Accountancy Age: ‘In essence what we see FRED 20 as doing is making employers be more honest to shareholders about their pension schemes.

Shareholders have the right to know what costs employers incur in employee remuneration. In the interest of open corporate governance FRED 20 is a very good thing,’ he adds.

There is evidence that this view is acquiring momentum. The number of companies using market values as a basis for valuation has risen dramatically from one per cent to 45% in the last three years, according to research by conducted by PricewaterhouseCoopers.

But perhaps there is a bigger concern here. More and more companies are offering new employees less generous defined contribution pension schemes instead of defined benefit schemes. Pension experts warn it could be those staff who bear the brunt of change.

FRED 20 is expected to take effect from December 2000 with provision for a long implementation process. The controversy is far from over.

HEROES AND VILLAINS OF PENSIONS INFORMATION DISCLOSURE

COMPANIES ACHIEVING TOP MARKS IN SURVEY

BAA

Barclays

BOC

Centrica

Daily Mail

Glaxo

Hilton

Legal & General

Reckitt Benckiser

Reed Elsevier

Schroders

Standard Chartered

Thames Water

COMPANIES FALLING SHORT OF ‘LEVEL REQUIRED’ BY SURVEY

Abbey National

BP Amoco

CGU

Compass

Norwich Union

P&O Royal & Sun Alliance

Royal Bank of Scotland

Scottish Power

Sema

Wolseley

WPP

Source: Lane Clark & Peacock seventh annual survey of accounting for pensions by FTSE-100 companies, August 2000.