Accounting watchdog proposes pension fund changes

LONDON (Reuters) - The UK accounting standards setter on Thursday proposed radical changes in pension fund calculations which could raise liabilities and force additional funding.

Among the changes being proposed by the Accounting Standards Board (ASB) is that liabilities should be calculated using the risk-free rate rather than on the value of high-quality corporate bonds, usually AA-rated, required by current accounting standards.

Using this lower return rate as the valuation benchmark would increase the size of firms' pension liabilities.

UK pension funds have benefited from the slump in price of AA-rated corporate bonds caused by the credit crunch, as they have seen the value of their pension liabilities fall accordingly.

This has allowed them to narrow the deficits between their assets or liabilities, even moving some funds into surplus. Critics have argued this is purely an accounting change that does not reflect a genuine improvement in the underlying finances of the pension fund.

The ASB also proposes moving away from the use of long-term assumption in valuing pension assets and liabilities.

The size of the assets and exposures should be stated in the period in which they arise, while pension funds' financial statements should reflect the actual return made by the assets they have invested, rather than the expected value as is currently required, the ASB said.

These proposals would reflect "the underlying economic reality" in the schemes, the ASB said.

The proposals were criticised by John Broome Saunders, actuarial director of BDO Stoy Hayward Investment Management, who called them "a real kick in the teeth" for firms who have defined-benefit pension schemes.