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.”