UK - Changes to the way pension fund assets and liabilities are calculated and reported have been set out in a discussion paper from the Accounting Standards Board (ASB).
Ian Mackintosh, chairman of the ASB, said: "The current generation of pension accounting standards have served the financial community well but, with the benefit of our experience of applying these standards, the time is right for a fundamental review by the IASB and the Financial Accounting Standards Board (FASB).
The paper suggests that changes in pension assets and liabilities should be reported in the period in which they arise, rather than being spread forward. It also proposes that the financial statements should reflect the actual return on assets, rather than the expected value as is currently required. It said both would reflect the underlying economic reality rather than allowing smoothing mechanisms.
On the measurement of liabilities, it argues for the use of a risk-free rate rather than the high-quality corporate bond rate required by current accounting standards. A reduced discount rate would increase the size of liabilities.
Martin Lowes, principal at Hewitt, said the proposals would make the pension promises of companies look riskier than they were because the proposed changes were inconsistent with the way other corporate debt was treated in the company balance sheet.
He said: "The promises made to pensioners by pension plans are essentially the same as other promises to pay made by companies, such as corporate debt and lease arrangements.
"There is no reason whatsoever for pension debt to be treated differently from other corporate debt.
"In real life, all those other promises dwarf the risks that companies are running on pension schemes but on the balance sheet it looks like pensions are the only big risk out there."
Phil Turner, principal at Mercer, described the proposals as "revolutionary" and said he did not believe the current accounting standards were in desperate need of an overhaul.
He said: "There are improvements that can be made to them and it seems that the ASB and FASB have both started a process of gradual, phased improvement, rather than trying to trigger a complete revolution in the way pensions are measured.
"My own sympathies are more with that gradual approach. But given this is only a discussion paper, it is good to have a conceptual framework."
The comment period runs until 14 July 2008, after which a report setting out final recommendations will be issued for consideration by the IASB and FASB.
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