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Current bond yields throw doubt on validity of FRS17
CURRENT double-A corporate bond yields throw doubt on the validity of current accounting standards, Barnett Waddingham says.
The consultant said scheme funding levels on an FRS 17 basis were improving despite falling asset values and market turmoil due a spike in double-A rated bond yields, which are used to value scheme liabilities.
It said this increase, coupled with falls in the expected rate of future inflation will in most cases more than offset the impact of falls in asset values - and could increase disclosed funding level of some schemes by as much as 35pc.
Barnett Waddingham said this highlighted the inconsistencies of an accounting standard which will be disclosing improved funding whilst employers are being put under pressure by trustees to pay additional funds into the pension scheme as a result of falls in asset values and a worsening of the strength of the employer's covenant.
Actuary Paul Hubbold said: "Auditors may argue that the current accounting standards do not show a ‘true and fair view'.
"This may lead to a whole range of approaches being adopted which in turn will lead to inconsistent results across similar companies. This questions the validity of current accounting standards and may further strengthen the proposals that are under consideration regarding the use of a ‘risk free interest rate' to discount pension liabilities e.g. gilt yields."
He added: "Companies need to be careful they are not overstating their funding positions and the accounting profession needs to determine how to place a fair value on long term pension liabilities on a company's balance sheet."
This article was published on the website of Professional Pensions on Tuesday 16 Decemeber. Please click here to view.