EUROPE - Reporting choices available to European banks under accounting rules can give investors a misleading view of the impact pension plans have on the banks' capital, a report by Moody's Investor Services revealed.
Donald Robertson, the author of the report, argued "financial statements do not consistently reflect" pension funds' obligations and, as a result, "financial reports are not comparable and, more importantly, balance sheets may not reflect economic reality".
Robertson used four banks as example - Barclays, UBS, Royal Bank of Scotland (RBS) and ING. Only in the case of RBS, according to his analysis, "presentation equals economic reality".
He said UBS' real pension plans' funded status was a deficit of CHF1.9bn (US$1.8bn), while the bank reported a surplus of CHF2.6bn. In the case of Barclays the real value of the plan's deficit was £3.9bn (US$5.9bn) compared to a reported deficit of £700m. And ING had a real surplus of €900m (US$1.2bn) while it reported a surplus of €2.4bn.
Robertson explained the difference between the funded status of the benefit plans and the amount reported on the balance sheet was caused by reporting options allowed under International Financial Reporting Standards (IFRS).
He said: "Companies - like RBS - may choose to fully reflect the funded status of their benefit plans on their balance sheet. RBS's plans are in a deficit position of £2.9bn, and this exact amount is recorded as a liability on its balance sheet."
However, he added: "The majority of the banks chose to use an alternative accounting policy available to them whereby they defer recognition of certain plan-related losses. As a result, their plans' funded status is not fully recognized on the balance sheet."
According to Robertson, even though the IFRS indicated it would shortly issue a proposal requiring the funded status of benefit plans to be fully recognized on the balance sheet, Moody's does not expect a final IFRS standard to be effective for several years.
He added: "In the meantime, investors will have to continue to pay careful attention to banks' footnote disclosures."
UBS, Barclays and RBS declined to comment on the report. An ING spokesman said: "We recognize the ING figures Moody's is using," but declined to comment further.
The first specialist independent firm advising pension schemes on bulk annuities or moving to a consolidator has been set up with ambitions to shake up the market.
The UK Statistics Authority's (UKSA) "refusal" to fix a long-standing error in the retail prices index (RPI) is "untenable" and demonstrates a need to commit to one measure of inflation.
Tim Sharp warns the DWP's plans for collective DC risk establishing an inhospitable environment for the lay trustee
This week's edition of Professional Pensions is out now.