Pensions body warns on accounting proposals

Controversial accounting proposals will hasten the closure of more final salary pension schemes if they are adopted, a leading pensions group said on Monday.

Many firms have shut their final-salary schemes due to volatile investment markets, longer life expectancy and tougher regulations, but proposals from the Accounting Standards Board (ASB) would force more to close, the National Association of Pension Funds (NAPF) warned.

The overhaul put forward by the ASB would force pension schemes to calculate their liabilities much more conservatively than at present, which would add billions of pounds to pension liabilities, the pensions industry has warned.

Analysis conducted on behalf of the NAPF showed the ASB proposals could double the reported liabilities of some final-salary schemes, which offer members a guaranteed income in retirement.

"These proposals are likely to further erode and weaken defined benefit provision in the UK, increasing reported scheme liabilities and undermining scheme sponsors' willingness to provide these types of pensions," NAPF Chief Executive Joanne Segars said in a statement.

It called for the ASB to drop its recommendation on valuing pension liabilities.

RISING LIABILITIES

Many blue-chip firms are already seeing their final salary pension liabilities swell rapidly due to falling long-term interest rates and rising inflation.

FTSE 100 firms' pension schemes have lost a total of 30 billion pounds in the second quarter, slipping to a deficit of 9 billion pounds from a surplus of 21 billion the previous quarter, according to research by pension consultancy Redington Partners.

Final-salary pensions are linked to inflation, so as inflation increases, so do firms' pension liabilities. In the past three months rising inflation has added over 12.5 billion pounds to the total liabilities of the FTSE 100 companies, Redington said.

It said there was a one in 20 chance that blue chip firms' pension schemes could lose a total of more than 5 billion pounds in a single day, due to the combined effect of adverse moves in interest rates, inflation and volatile investments.

Pension schemes should beef up their risk management to protect themselves from major swings in their fortunes, it said.

Some of the largest pension schemes were effectively running the same amount of daily risk as a major financial institution such as Goldman Sachs, but without any of the controls in place at the investment bank, Redington said.