NAPF warns of fresh final salary threat
4 Aug 08
Controversial proposals to radically alter pensions accounting could double the liabilities reported by some schemes and risk more defined benefits schemes closing to new members, according to the National Association of Pension Funds
It says that under proposals from the UK Accounting Standards Board, liabilities reported by young schemes could double while those for medium and mature schemes could increase by 60 per cent and 25 per cent respectively.
The ASB’s most radical proposal would switch the discount rate – the level at which future liabilities are discounted to their present value – from the current use of a double-A corporate bond spread to the lower so-called risk-free rate, assumed to be equivalent to interest rates on government bonds. This would make liabilities look larger. The biggest impact would be on younger schemes that have the longest-running liabilities.
Supporters say the risk-free rate will be fairer than a corporate bond rate. Last year the spread of corporate borrowing costs over government rates spiked. But the higher levels, in spite of the higher risk they represented, reduced deficits.
The NAPF warned that defined benefit pension sponsors could be more reluctant to offer schemes if the accounting toughened further. It noted that almost 70 per cent of such schemes were closed to new members compared with about 30 per cent when the ASB introduced its pioneering requirements.
Joanne Segars, NAPF chief executive, said: “The ASB cannot operate in a vacuum, indifferent to the consequences of their actions. It should revise its proposals, especially those relating to the risk-free discount rate.”