UK - Pension scheme deficits could be slashed dramatically if FRS17 assumptions were based on current rather than projected salaries, Morgan Stanley claims.
Under current rules it is assumed that pension schemes will be ongoing and therefore should be based on workers’ final salaries.
But Morgan Stanley says that as some companies such as Ernst & Young and Iceland are freezing their pension schemes – effectively closing their pension schemes to future salary increases – then liabilities should be valued on that basis.
Morgan Stanley executive director Gareth Derbyshire said: “FRS17 is meant to reflect economic reality. If companies are readily able to cut the link to final salaries for their pension schemes then that liability should be based on current salaries and not projected salaries.”
He added: “If you made that change the standard would still be volatile but you would be taking in the liabilities at a lower level and so people's starting position would at least be healthier.”
SEI Investments senior analyst Andrew Slater agreed: “FRS17 is wrong to be focusing on projections that allow for future salary increases. It should focus on an assessment of the liability which does not allow for future salary increases.”
Slater explained that the salary assumption is made up of two components – inflation plus a few extra percentage points to allow for wage increases.
He noted that if FRS17 did not include a salary assumption then benefits would still legally have to rise by inflation up to a maximum of 5%.
Slater said that if companies could persuade their auditors of the case then they may already be able to move away from projected benefits.
He said: “It is possible enough to make this change already if a company is willing to put up a big enough fight. There is nothing to stop directors taking future salary increases as inflation and not inflation plus something.”
By Jonathan Stapleton
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