UK - The difference in the current climate between corporate bond yields from companies in the financial and non-financial sector highlights the need for pension schemes to choose the method for valuing liabilities "responsibly", Barnett Waddingham has claimed.

The consultancy firm pointed out one impact of the recent turmoil in the global markets is final salary schemes seeking to value their liabilities for accounting disclosures could find the figures vary by as much as £250bn (€323bn).

The actuarial and consultancy firm claimed this is because the liabilities are valued in accounts in relation to the yields on long-dated AA-rated corporate bonds.

But while sterling long-dated AA corporate bonds have a current yield of around 7.25% a year, Barnett Waddingham suggested this figure "masks the distortion within the UK corporate bond market", as two-thirds of the bonds are issued by companies in the financial sector with yields of almost 8%.

The firm said this is almost 3% a year higher than the yield on government-backed long-dated gilts, and well above the 6% yield on AA bonds issued by companies outside of the financial sector - which has been hardest hit by the market turmoil.

Marcus Whitehead, partner at Barnett Waddingham, said finance directors and advisers should pay close attention to the divergence between the different types of bonds and "choose their accounting assumptions responsibly".

He said: "With long-dated AA financial bonds yielding over 3% per annum above gilts, their use as a proxy for high quality corporate bonds should be considered carefully."

In addition, Whitehead pointed out the difference between the yields "gives more weight to the argument that corporate bonds are not necessarily the right way to value pension scheme liabilities in accounts", which follows proposals by the UK Accounting Standards Board (ASB) to implement a risk-free discount rate and use gilts instead of corporate bonds in accounting. (See earlier IPE articles: O'Brien warns ASB plans may 'hasten' DB closures and Proposed ASB pension reporting seen as "misleading")

Whitehead added: "These market conditions show the folly of trying to have a fixed methodology to reporting pension scheme accounting values that will fit all circumstances - it will work when it is set, but the markets will then do the unexpected and your nice fixed methodology is suddenly looking far less sensible."

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