The Investment Management Association has responded to the Accounting Standards Board’s (ASB) discussion paper on the financial reporting of pension funds. Richard Saunders, Chief Executive of the IMA has written to the Secretary of State for Work and Pensions to draw attention to the wider policy implications of the ASB’s proposal that pension liabilities should be discounted using the risk free rate.
“We have already seen significant closures of defined benefit pension schemes in the private sector and accounting treatment has played its part in this,” says Liz Murrall, director, corporate governance and reporting at IMA. “The proposal to discount liabilities using the risk free rate will significantly increase the valuation of defined benefit pension liabilities. This will further aggravate closures and will have other unintended consequences. First, in many instances it will value a scheme’s liabilities at more than the cost of a total buy-out. Secondly, it will not give a true picture of a scheme’s ability to meet its liabilities. Pension schemes do not need short term liquidity and can invest for the long term, capturing long term investment yields. Equities deliver returns significantly above risk free assets and protect against inflation. Furthermore, the risk free rate is likely to drive pension schemes into more conservative asset allocation, accelerating the trend towards bonds as seen in recent years. This is likely to reduce returns over time, and may ultimately call into question schemes’ ability to meet their long term liabilities. It would be a mistake however to blame the accounting rules alone for these outcomes. To the extent that accounting standards simply reflect the financial realities, then the consequences flow from a regulatory and legislative environment that seeks as far as possible to remove all risk. The result is that they end up achieving precisely the opposite from their initial intentions.”
The IMA’s response is available on the IMA website.
The ASB discussion paper is available on the ASB website.