The Accounting Standards Board is pressing ahead with plans to force companies with pension funds to reflect the current market value of investments on their balance sheets, despite evidence that the move could introduce damaging fluctuations.
In the face of resistance from actuaries and blue-chip companies, the ASB is expected to agree a new pensions exposure draft at its next meeting in September. The standard – which could persuade some funds to pull out of equities and invest more conservatively – could apply as early as next year.
The ASB is not releasing the results of a series of secret studies carried out by the likes of PricewaterhouseCoopers, Sainsburys and Glaxo. But participants said requirements to show pension assets and liabilities would introduce huge swings year on year.
To smooth the impact, the new standard will require changes to be reported in the statement of total recognised gains and losses. Recycling subsequent gains through the profit & loss account will be prohibited.
Project director Anne McGeechin said field tests ‘bore out our expectation that they would be big and bumpy numbers, but they need to be viewed in context’. The STRGL approach will highlight long-term trends, but keep changes away from operating profit and loss figures, she added.
Glaxo and Sainsbury’s field tested the standard by applying it retrospectively to their accounts. PricewaterhouseCoopers conducted similar trials with around ten clients. Sainsbury’s pension manager Geoff Pearson said: ‘Our concern is that volatility will take more account of noise in the system than the likely real increases in pension costs.’
Michael Pomeroy, chairman of the Institute of Actuaries’ pension board, said the trial results were ‘as expected’. He warned companies might now invest more in bonds than equities, and scrap final salary schemes.
‘If you move away from actuarial smoothing, you will get something more transparent, but more volatile,’ he said. ‘The STRGL approach will keep some of the volatility out of the profit & loss, but not all of it. Swings from one year to the next will go through to the balance sheet.’
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