Credit rating agency stands by ‘flawed’ pensions logic

Leading credit rating agency Standard & Poors has come to the defence of
the Accounting Standards Board, after a report claimed the organisation used
‘flawed logic’ when drafting its new standard for pension deficits.

The report, compiled by SEI Investments and Cardiff Business School, said the
FRS17 standard had over-inflated pension liabilities to the extent that the
FTSE100 deficit of £37bn would be reduced to zero if the ASB implemented an
appropriate discount rate method.

However, Sue Harding, European chief accountant at Standard & Poors,
argued that the ASB had explained the reasons for the discounting method
specified in FRS17 and that it was up to the market to interpret the deficit
disclosures correctly.

‘The discount rate in FRS17 is nothing more than a financial assumption made
for the sake of consistency. The ASB had to make a cut so that there was a
common starting point for all companies and we understand that,’ Harding said.

The SEI report claimed that the discount rate prescribed by FRS17, linking
discounting to the yield of an AA-rated bond, was low and had led to an
over-estimation of pension deficits. Discount rates should instead be based on
individual companies’ weighted average cost of capital.

‘The logic of FRS17 falls apart by resting on a discount rate that is
arbitrary and does not take into account the market-determined cost of capital
for the sponsoring firm,’ said Andrew Slater, institutional strategy director at
SEI Investments Europe.

But Harding warned that using any single discount rate would deliver
difficulties, and that all pension deficit disclosure required further analysis.
‘FRS17 has been helpful, but investors need to dig in and look into the detail,’
she said.

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