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The numbers racket

Pensions deficits are a movable feast when actuaries can choose whatever assumptions they like

Accountants and actuaries have never been very far removed from the art of witchcraft, in my opinion. Granted, the servants of these professions might prefer to innocently cloak themselves in grey suits rather than black capes, but that’s where the differences end. A good accountant can magically increase or reduce tax liabilities with the wave of their wand – and as long as he or she is careful to carry out their actions in the name of avoidance and not evasion, no one ever seems to take any notice. The same also appears to be true for actuaries, who have a talent for manipulating companies’ pensions’ liabilities to order – regardless of any changes in the externalities affecting these schemes.

I mention this having read the 2008 edition of Lane Clark & Peacock’s “Accounting for Pensions” report – a study which, I’m glad to say, is significantly more interesting than its title might suggest.

Every year, LCP’s consultants carve up the annual reports of the UK’s 100 largest quoted companies, collating all the pensions data found in the depths of their accounts, and using this to map any trends developing across the pensions’ landscape.

Collecting the data is certainly much easier today than it was when the study was first published 14 years ago – before the days of FRS 17, IAS 19 or the Pensions Regulator – all of which have helped to force companies to disclose ever greater volumes of pensions’ data in their annual report.

However, while disclosure has undoubtedly improved, the LCP report shows that there is little to suggest the pension figures included in the annual reports bare much relation to the truth.

The problem is the ever widening gap between the actuaries’ assumptions – differences which at first glance may seem too small to make a fuss about, but which on closer examination can change the size of pension deficits or surpluses by hundreds of millions, or even billions of pounds.

The four main moving parts are the expected return on various asset classes, the discount rate, inflation and the life expectancy of the scheme members – all of which are frequently shifted significantly by scheme actuaries on an annual basis, even though they are meant to be long-term forecasts.

This year, for example, around a third of FTSE 100 companies saw their expectations for the average returns on equities increase, with the likes of Standard Chartered predicting average annual returns of as much as 8.5 per cent. Next, on the other hand, predicted that equities would return just 6.55 per cent a year – down from 6.7 per cent last year.

Although I’m sure that the actuaries and investment consultants of the most bullish companies can make a very persuasive argument as to why their forecasts are so high, it strikes me that it should not be in their gift to make these predictions in the first place. In the case of FirstGroup, for example, which has a massive 70 per cent of its pension fund invested in equities, it seems irresponsible to also assume that equities are going to return 8.45 per cent a year. It also uses the very lowest assumption for inflation of all of the FTSE 100 pension schemes – just 2.8 per cent. If it were to raise this forecast above 3 per cent, in line with the majority of its peers, while reducing its equity forecast below 8 per cent, it would undoubtedly wipe out its reported £15m surplus, and be forced to report its scheme many millions of pounds in deficit.

While I can understand that different companies might have different assumptions for their employees’ life expectancies (miners do, after all, statistically live shorter lives than office workers), I can’t see why scheme actuaries should be free to manipulate forecasts for inflation, equity returns and discount rates. These should be determined by the Pensions Regulator, on a conservative basis, ensuring that scheme members and shareholders can get an accurate and consistent picture of how their company’s pension scheme is faring. Changes to IAS 19 should address some of these anomalies. In the meantime, however, advisers who are meddling with the truth should examine their conscience.

James Daley is personal finance editor of the Independent


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