ACT Refutes ASB Ideas on Pension Accounting

30 July 2008

The ACT takes the view that the ASB's proposal that pension liabilities should be discounted at the risk free rate is not soundly based in principle. It would increase reported pension liabilities and would exacerbate the trend for companies to close their defined benefit pension schemes, particularly affecting the UK.

Commenting on the Accounting Standards Board's Discussion Paper, "The Financial Reporting of Pensions", Richard Raeburn, Chief Executive of the Association of Corporate Treasurers (ACT) said

 It is not the role of the accounting standard setters to be driving this sort of societal change and the accounting profession must take into account this very real consequence for the lives of many people. 

Within the area of pensions accounting there can be many different arguments and justifications for various different treatments. Unless the justifications in one direction or another are overwhelming, the best solution can be pragmatic knowing that it is not perfect and remains in some ways arbitrary.

Responding to the ASB's discussion paper, the ACT submitted its comments from the standpoint of corporate preparers of accounts.

The ACT broadly supports other ASB proposals in this field, for example the idea of recognising actuarial gains and losses immediately rather than the current option of spreading them over future accounting periods, since this would be 'less arbitrary'.

For full the text www.treasurers.org/asbpensions/actresponse/0708
The ASB Discussion paper can be found at www.apb.org.uk/asb/press/pub1513.html

Notes to editors

Pension Scheme Liabilities

The liabilities of a pension scheme are currently reported as the net present value of the expected cash outflows to pay the pension entitlements, discounted at the AA rated bond rate, rather than using a lower risk free rate. One can accept that it is illogical to use a discount rate that reflects the default risk of the company because to do so would result in the perverse outcome that companies with poor credit ratings would show smaller liabilities. There are, however, other elements, notably liquidity and maturity risk premiums, that remain relevant. The premium in going from a risk free rate to an AA rate can be used as a proxy for these other premiums.

The ASB Paper

The ASB paper is part of Europe's 'Pro-active Accounting Activities in Europe' (PAAinE) initiative, which is a partnership between the European Financial Reporting Advisory Group ('EFRAG') and European standard-setters. The development of the paper has been led by the Accounting Standards Board ('ASB'), in collaboration with EFRAG.

For further information, please visit the ACT Press Room.