Risk-free rate ‘not appropriate’

UK companies have rejected the
Accounting Standards
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
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.

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Fiona Westwood of Smith and Williamson.