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‘DB plans face deficits over perverse accounting rules’

Standard Life says final-salary pension schemes are understating their liabilities because of “perverse” accounting rules.

DB schemes calculate assets based on current market values and liabilities on the discounted rate of future benefits using AA corporate bond rates.

As corporate bond prices fall – 20 per cent in the past year – the yields increase by the same amount. As such, schemes are able to discount their liabilities at a higher rate, around 7 per cent currently, and therefore appear to be covering their liabilities, even if the value of their assets has fallen sharply as a result of market turmoil.

Standard Life head of pension policy John Lawson says accounting rules create a “false sense of security” and many schemes will be left with deficits.

He says: “Schemes’ pension liabilities are valued using this odd technical measure. It is perverse that this accounting mea-sure is making it appear like schemes are still well funded when they may not be. This is only masking the issue.”

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