International Accounting Standards Board chairman, Hans Hoogervorst, has said arguments to change the accounting standard are "flawed" as it should reflect the economic reality, no matter how ugly.
Speaking at a pensions conference in the Netherlands on 8 December, he strongly rejected calls to change the way defined benefit (DB) pension liabilities are measured under the IAS 19 standard in response to the low yield environment.
It has been argued if the return on assets can be expected to be higher than the discount rate, then fewer assets are needed to pay liabilities than is suggested under IAS 19. This would effectively reduce pension deficits, which are high because IAS 19 uses corporate bond yields to calculate the discount rate on liabilities.
However, Hoogervorst defended the standard's requirement for using a discount rate that reflects a fixed interest return, because a DB liability is a debt to employees where the payments are fixed or indexed, and not affected by the actual return on assets held.
He said using actual returns to calculate discount rates "fails to properly take account of risk" and is "inconsistent with prudent financial management".
Rather, the real problem is extreme monetary policy, which has created the low rate environment and in turn created an incentive for leverage.
A return to normality of macro-economic policies is the only healthy way forward, he said.
"A return to more normal interest rates will reduce the pension liability and will be beneficial for the long-term health of the pension system. But even then, short-term pain seems inevitable, because a lot of damage has been done.
"While the pension liability will be reduced, there will probably be short-term harm to both your bond and stock portfolios. This is another reason why I do not believe that our accounting for the pension liability exaggerates the problem. It is simply not going to go away easily."
Hoogervorst went on to question whether the threat of deflation is really as big as it is made out to be by central bankers. The European Central Bank's president Mario Draghi recently said its unconventional monetary policy is necessary to avoid negative inflation.
"Even if prices were dropping by one-two per cent per year (which we have not even come close to since 2008) it is extremely unlikely that this would have induced significant postponement of consumption or investment," he said.
"Consumers have never stopped buying laptops when their prices dropped by 20%-30% per year. Mild deflation is just as unlikely to dampen consumption as mild inflation would be an incentive for consumers to bring purchases forward. So why go into ever more extreme monetary territory when prices are basically stable?"
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