Accounting rules mask £75bn pension deficit

Accounting methods and falling bond yields will give shareholders a nasty
shock when they see companies’ pension libiliites have increased by 25% over the
past six months.

During the financial crisis higher yields on corporate bonds, which are used
to calculate pension liabilities on an accounting basisi, resulted in improved
funding positions. But in the last six months falling bond yields will see
liabilites grow by 25%, despite assets rising by 20% in the same period, finds
PwC.

The firm explains that the fall in bonds is pushing convergence between
liabilities reported on a scheme funding basis and under accounting rules.

“Some will be shocked to find their accounting deficits have increased
because liabilities have increased faster than assets as a result of falling
bond yields,” said PwC partner Brian Peters.

Pension liabilities for the FTSE 100 could total £75bn in end of year
accounts.
“As the investor community makes its decisions based on the accounting numbers,
we could see their shock reflected in share prices as these figures grow as a
result of falling bond yields. Companies need to anticipate this and consider
the extent to which their investors will have factored these issues into their
valuation,” added Peters.

Further reading:

Pensions Risk Management: Snooze
you lose – convincing trustees to take the risk out of pensions