Flawed accounting method hides true scale of pension fund losses

Many of Britain’s biggest companies are preparing year-end accounts that show their pension schemes moved into surplus last year despite the collapse in world markets, which wiped hundreds of billions from their assets.

The latest figures from the pensions advisers Aon Consulting show that a steep decline in the FTSE 100 over last year and a sharp drop in commercial property values has sent most final-salary schemes into crisis and pushed fund deficits to new lows. According to government figures, company pension fund deficits rose in the 12 months to November from £58bn to £155bn.

Aon Consulting warned that the figures underestimated the problem and pension funds had suffered a £226bn loss on their investments in the year to October.

However, accounting rules – which critics argue distort company pension scheme fund values – will show a rise in assets. For the top 200 companies in Britain, that will mean a £13bn surplus at the end of 2008. Aon says the top 100 firms have seen a £5bn improvement over the last year, based on current accounting rules.

Auditors must calculate deficits using the IAS19 accounting method, which assumes pension funds are invested entirely in corporate bonds and ties the value of the fund to current bond yields. Calculations under IAS19 put pension deficits at £2bn in December 2007. Figures from Aon show that a subsequent rise in bond yields turned that small deficit into a surplus of £3bn.

Marcus Hurd, of Aon, said when bond yields were low IAS19 exaggerated deficits, but now it was hiding them. In 2007, yields were 5.75% whereas last November they stood at 6.8%. He said that while a handful of schemes were heavily invested in corporate bonds, most had a mix of assets and tended to rely heavily on stockmarket investments. “They will be invested in stocks and shares, commercial property and bonds, which have all gone down in value, but the accounting rule says it is only the bond yield that counts.”

In the battle over the future of company pension schemes, it is expected unions will use IAS19 to argue that employers must honour existing commitments because the accounting figures show schemes remain in a healthy state.

Union leaders have already fought several high-profile disputes over cuts in pension benefits and in most cases forced employers to backtrack. In May, workers at the Grangemouth oil refinery went on strike to keep its final-salary pension scheme open to existing members and new entrants.

Final-salary schemes typically promise to pay a retirement income worth two-thirds of a worker’s last wage slip after 40 years of employment. About 80% of schemes in the UK are closed to new entrants. Unions fear employers are planning to close the remainder and may halt accruals for existing staff.

Hurd said employers and scheme trustees were well aware that the underlying assets in their funds had collapsed in value. In a report last month Aon said companies could be forced to pay up to £45bn a year for the next five years into their final-salary pension schemes to make up for the £226bn loss this year on their investments.

Phillip Inman
Friday 2 January 2009

Source: The Guardian

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