As it released its sixth annual survey of the way FTSE 100 companies account for pensions, Lane Clark & Peacock sounded a warning about the proposed new pensions accounting standard. If the ASB proceeds with its plan to show pension assets and liabilities at their market value, companies could close down final salary pension schemes and replace them with money purchase schemes, the firm claimed. These lump sum schemes are easier to administer and value, but much less beneficial to employees.
Richard Abramson, a partner at the firm, said: ‘A change in accounting treatment could further jeopardise the system of company pension provision which has served the UK so well for so many years.’
Lane, Clark & Peacock is concerned the resulting volatility could impact on company profits and dissuade finance directors from improving their employee benefits.
The report said: ‘At worst, we could see a new standard which represents the final nail in the coffin of defined benefit contribution. Companies who were not prepared to see volatile pension costs (or higher costs) would close down their schemes and those who might otherwise have made benefit improvements out of surpluses would chose not to, as a result of the accounting treatment.’
Steve Mingle, group pensions manager for Diageo, endorsed the actuaries’ criticisms. ‘Accounting concerns shouldn’t have an impact on the way we invest pension fund money. We might be required to invest in ways we wouldn’t have done in order to get more accounting stability.’
Even more worrying, the standard could deter companies from introducing benefit improvements, because they will have to be shown as a one-time hit. ‘If they’re spread over a longer period, the effect is not so dramatic,’ said Mingle.
ASB technical director Allan Cook said the board was ‘not surprised’ that field tests of the new rules showed pension values would vary from year to year. ‘We knew there was volatility there; our job is to find ways to cope with it,’ he said.
The exposure draft of a standard to replace SSAP24 should appear by the end of September and could apply as early as next year.
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