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Investment rethink to avoid volatility

Volatility in the balance sheet, highlighted by a new pension accounting standard, can be lessened by rethinking investment strategies, says Aon Consulting.

In its new research examining the impact of FRS17, the new pension accounting standard, Aon recommended a changed investment strategy, such as greater investment in bonds, as a way of mitigating volatility in a company’s balance sheet.

However, the company warnedt such an approach may substantially increase the pension expense due to lower returns.

Pioneering such a shift, in November 2001 Boots announced its decision to move all its final salary pension scheme assets out of equities and into bonds.

Donald Duval, head of Aon’s actuarial and benefits practice said: ‘There are a number of ways that the impact of FRS17 on a company’s accounts can be mitigated. However, the choice is dependent on the scheme’s circumstances, and each method will have its own advantages and disadvantages. In addition, the ways to mitigate the impact of FRS17 are not the same as the existing ones used to mitigate the impact of SSAP24.’

FRS17, which takes effect in parts from December 2001 to June 2003, requires companies to show the value of a company’s assets and liabilities at market value.

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