Proposals to change the way in which companies account for pensions have been
slammed by the Investment Management Association.
The ASB launched a consultation paper in January that has been interpreted by
industry as estimating pension assets based on government bonds, which would
lower their value.
The IMA, which is the trade body for the UK’s £3.1bn asset management
industry, has not only responded to the ASB’s discussion document but has also
written to the Secretary of State for Work and Pensions to draw his attention to
the wider implications of the proposal that pension liabilities should be
discounted using the risk-free rate.
Earlier this month pensions minister Mike O’Brien said that he would make
representations to the ASB due to concerns from the City that pension values
could be lowered under the new plans.
IMA director of corporate governance, Liz Murrall, said the IMA had already
seen significant closures of defined benefit pension schemes in the private
‘Accounting treatment has played its part in this. The proposal to discount
liabilities using the risk free rate will significantly increase the valuation
of defined benefit pension liabilities. This will further aggravate closures and
will have other unintended consequences,’ she said.
The IMA warns that, in many instances, the practice will value a scheme’s
liabilities at more than the cost of a total buy-out and will not give a true
picture of a scheme’s ability to meet its liabilities.
‘Pension schemes do not need short term liquidity and can invest for the long
term, capturing long term investment yields. Equities deliver returns
significantly above risk-free assets and protect against inflation,’ the IMA
The organisation warned that a risk-free rate would be likely to drive
pension schemes into more conservative asset allocation, accelerating the trend
towards bonds as seen in recent years.
This is likely to reduce returns over time, and may ultimately call into
question schemes’ ability to meet their long term liabilities.
‘It would be a mistake however to blame the accounting rules alone for these
outcomes. To the extent that accounting standards simply reflect the financial
realities, then the consequences flow from a regulatory and legislative
environment that seeks as far as possible to remove all risk. The result is that
they end up achieving precisely the opposite from their initial intentions,’ the
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