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Survey points to inadequacies of IAS19 as liability indicator

Pension schemes are having an ever increasing impact on companies’ share prices according to Pension Capital Strategies’ second annual survey of equity analysts’ views on pensions.

The report shows that analysts are placing increasing importance on the solvency position of the pension scheme, with 97 per cent believing IAS19 is either a fair estimate or an under-estimate of the “true” size of pension liabilities. It also reveals that 78 per cent of analysts are now asking companies for information on the pension scheme solvency position, compared to a figure of 57 per cent a year ago.

The 2008 survey also shows that while the majority of analysts would view a switch from equities into bonds in the pension scheme as neutral, more would view it positively than negatively, despite the impact on the companies profit and loss account. This contradicts the conventional view that the City has a bias towards equity investment in pension schemes.

Charles Cowling, managing director of PCS says: “The results of this survey should sound a loud warning bell to company management. They suggest that the City is becoming warier of company pension schemes. In particular, IAS19 is seen as an inadequate measure of the pension liability, and the favourable treatment of pension scheme investment in equities under AS19, is increasingly disregarded by analysts.

“These findings suggest that City analysts might be supportive of the Accounting Standards Board’s recent controversial discussion paper The Financial Reporting of Pensions, which proposed a more prudent and significantly higher calculation of pension liabilities, using a risk-free discount rate rather than the current AA bond discount rate, and also proposed that the current policy of allowing companies to boost their profits by including the expected return on pension assets should cease.”

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