FRS 17: friend or foe?

It is a rare occasion when an accounting standard takes up so many column inches in national newspapers. Yet that is exactly what has happened with FRS 17 – the new, and yet to be fully effective, accounting standard on retirement benefits. But have most commentators missed the central issue?

In the past there have been a number of accounting standards that have caused a fair amount of controversy in corporate circles, but few have reached outside the finance pages of the media to the extent that FRS 17 has.

In the one corner we have the Accounting Standards Board which aims to bring greater transparency to accounts. In the opposing corner there are company directors and business representatives who claim that FRS 17 is forcing them to close their final salary pension schemes to employees.

Arguments over the standard are here to stay and there are no signs of either side backing down.

And the furore is now no longer limited to the corporate world. MPs and union leaders are vehemently calling for the accounting rule to be banned.

Work and pensions secretary Alistair Darling recently called in the ASB to discuss the differences between the UK and the international rule on pensions.

Darling’s meeting was followed up by Paul Myners, the head of the Treasury review of institutional investment, pressing for changes to the UK standard. ‘Accounting purity shouldn’t always be pursued with disregard for social consequences,’ says Myners.

‘Huge damage is being done.’

Myners also sits on the Financial Reporting Council, the body that oversees the ASB’s work. He said he was using his position to lobby for reform of FRS 17. The ‘accounting purity’ issue is the argument used by both detractors and supporters to stand up their points of view. While standard-setters argue they do not create the pensions’ shortfalls, but merely reveal them, critics say that it must be acknowledged that the whole ethos of funding is based on the long-term.

The subject of pensions may be more sensitive than ever before, but is the solution to outlaw the standard?

One answer is that, in a way, that may be impossible.

All listed companies of the European Union’s 15 member states, estimated to number around 7,000, must comply with international accounting standards by 2005 at the latest.

And international accounting standards include IAS 19, a rule on retirement benefits. It is practically the same as the US standard and not too dissimilar to FRS 17 as it currently stands.

But IAS 19 may be about to be changed following an announcement by the International Accounting Standards Board that it is to undertake a review of the standard.

Sir David Tweedie, head of the International Accounting Standards Board, says: ‘The IASB believes it is important to be responsive to legitimate concerns with standards raised by parties involved in financial reporting. Consequently, we have moved quickly to address a specific problem that practitioners have identified in an existing standard.’

But Britain has one advantage over the rest of the listed companies in EU member states – the UK’s ASB has been attempting to work in parallel with the IASB for a number of years. UK standards are probably the closest in the world to IASs and if gamblers were to lay bets on whether IAS 19 will become more like FRS 17, experts say they would be on to a winner.

Their hunch is based on the fact that FRS 17 was developed at the ASB while it was under the leadership of Sir David.

Sir David does, however, have to convince the other 13 board members of the benefits of a more transparent pensions standard.

Disturbingly, a series of calls around a number of FTSE companies revealed that few were aware of, or prepared for, the implications of the switch to IASs.

Other observers believe the attacks on FRS 17 have been used to obscure other problems. It is a case, says David Chitty, technical partner at Chantrey Vellacott, of ‘shooting the messenger’.

Chitty explains that regulatory changes to pensions’ funding were brought in on the back of the Maxwell debacle to give greater protection to the members of schemes. ‘Policymakers should therefore stop attacking FRS 17, and realise that the information that it requires disclosure of will provide greater protection to all investors, including the wider community of pension fund members,’ he says.

Supporters also wish to point out to critics they ought to recall other factors – increased scheme maturity, declining mortality, decreased risk tolerance, weak equity markets and the minimum funding requirement – that have led to closure of final salary schemes.

‘The accelerated demise of defined benefit schemes is no surprise. Employers are responding to increasing costs and risks that have been clear for some time,’ says Crispin Southgate, a credit strategist at Merrill Lynch.

The solution therefore may not lie in dispensing with the controversial standard. Although neither the US nor the IAS rule at present requires pension surpluses and deficits to be booked into the accounts, they do require disclosure. And, as analysts say, once the figure is disclosed, it is just a case of calculating the cost of funding a scheme.

What has to be done now is to educate the people that count.