Short-term accounting ‘no good for pensions’

ACCOUNTING STANDARDS that leave pensions prey to market volatility are undermining the sector and pushing companies to close viable schemes, a new report has claimed.

The National Association of Pension Funds warned mark-to-market accounting is “inappropriate” for pension schemes, as it introduces short-term volatility to products whose economic position changes slowly over time.

Companies could pursue overly cautious investment policies to avoid this effect, inadvertently ramping up the cost of pensions and reliance on low-return government bonds.

NAPF chairman Lindsay Tomlinson said: “The current standards are not appropriate for the long-term nature of pensions. They allow short-term stock market volatility to perversely affect pensions and their long-term strategy by presenting large deficits which may prove inaccurate in the long run.”

Employers worried about “allegedly large” deficits might close defined benefit pension schemes to existing and future members, and the low-return investment strategy could deal another blow to the economy, she warned.

Tomlinson accused standard setters of operating in a “vacuum of accountability”, focusing too much on theory rather than practice. They “need to have a real-world approach that truly takes into account the economic consequences of their actions”, she concluded.

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Fiona Westwood of Smith and Williamson.