The Debate: Accounting for pensions

Pensions – the bigger pictureBy John Pierce

The headlong rush for accounting purity has in one instance been halted in its tracks. Thanks to the efforts of ourselves, and others, and the application of some common sense the regulators – in this case the Accounting Standards Board – have conceded that to insist on the implementation of FRS17 would have been unwise.

A move to internationally recognised standards is welcomed as the preferred goal by investors, companies, analysts, commentators et al and the focus of attention can now move from FRS17 to a review of the international equivalent, IAS19 as is – or to be revised. Rather than spend time and intellectual effort agonising over the temporary introduction of FRS17 under the earlier proposals, we can now revisit the arguments underlying this standard.

Pension schemes for the vast majority of businesses are long-term considerations.

They are inexorably linked with employee remuneration, and indeed many employers and employees consider them as deferred pay.

The funds to meet the pension cost, are invested for the long term to meet the liability. Of course, their value must be regularly assessed and compared with the revised estimate of the future liability to the pensioners. Shareholders should be told of the difference and the company proposals to deal with any shortfall/excess. But to adjust annually – on questionable valuation bases – is lacking the common sense that has just come to our rescue. Companies have to report half-yearly, and soon if the EC transparency proposals go through, quarterly. So why not adjust for pension gaps quarterly?

There is enough volatility around without artificially creating more.

By all means fully disclose the situation but lets keep our feet on the ground and let sense prevail by moving to IAS19 as it stands – allowing for a modicum of ‘smoothing’ to reflect the long term nature of the pension contact, rather the annual ‘snapshot’ of FRS17.

  • John Pierce, chief executive, Quoted Companies Alliance.

A step in the right directionBy Peter Holgate

Over the last decade there has been a remarkably strong consensus among pensions accountants and actuaries for a move to market values.

Actuaries have moved to using market values for scheme assets rather than their own dividend yield-based valuations.

Accountants have seen the move in terms of a general shift of emphasis away from spreading and smoothing in the profit and loss account to getting the balance sheet right, and basing the balance sheet increasingly on market values.

The original standard, SSAP 24, seemed like progress when it was introduced in 1988. At least it moved us away from cash accounting. But many of us pondered on the meaning of showing an asset on the balance sheet when there was a deficiency in the scheme. This rather common phenomenon seemed inexplicable, but we gradually came to realise that it was in fact meaningless (the standard’s deficiency) rather than merely hard to understand (brain deficiency). It certainly wasn’t reality (the pension scheme deficiency).

‘We had better move to reporting market values,’ said the accountants, and the actuaries agreed. ‘Let’s get the balance sheet right. Let it show the actual surplus or deficit in the scheme.’ But just as a consensus began to emerge, the IASC and the Americans got cold feet. Faced with a potentially volatile time series of numbers, they balked at the reality that would be portrayed. Hence a spreading mechanism, called the ‘corridor’ was invented. This delightful metaphor confused most accountants and actuaries, but at least the architects understood it. The investment community hated it. The IAS19 corridor represents the worst of both worlds: a standard claiming to be based on market values but in practice still based in spreading and still giving meaningless results.

FRS17 has been criticised for many things, including accelerating the demise of defined benefit schemes. Most of this is unjustified. It is of course not perfect.

The argument that it deals in a short-term manner with a long-term phenomenon has some merit. But to move to the fudge known as IAS19 is not the answer.

  • Peter Holgate is senior technical partner with PricewaterhouseCoopers.

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