Accounting standards used by companies to calculate pension assets are too focused on the short-term, undermine occupational pension provision and should be reformed, according to a report from the National Association of Pension Funds.
Released today, the report, Accounting for Pensions, says the International Accounting Standards Board rules use current market prices to value surpluses and deficits allowing short-term market volatility to skew the measurement. It recommends they should instead be valued on how the plan sponsor expects them to perform over the long-term, discounted for inflation.
NAPF chairman Lindsay Tomlinson says recent turmoil in the markets highlights how volatility can present large deficits which may be inaccurate in the long run.
He says: “This can have serious repercussions for pension provision, retirement saving and the economy. Employers who are faced with these large deficits may decide to close the defined benefit pension schemes to existing and future members.”
Supporters of the IFRS rules say they bring clarity around a risk that was previously badly understood. In July, the Government applied similar rules to public sector pensions, publishing figures which put the current liability at £1.13trn.
Tomlinson says the size of the deficits that appear after sharp falls in the market can lead schemes to adopt extremely cautious investment policies.
He says: “By choosing to invest in low return assets such as bonds rather than equities, pension schemes are not only likely to be following sub-optimal investment strategy, but will also support the economy less at a time when there is a risk of a double dip recession.”
The report was carried out in conjunction with Leeds University Business School.