UK - The voluntary adoption of prudent accounting assumptions when calculating pension liabilities has already added an additional £40bn (€47bn) onto UK company balance sheets, and future changes to accounting rules could impact companies by a further £70bn, KPMG has warned.

Findings from the company's 2009 Pensions Accounting Survey showed high credit spreads on high-quality corporate bonds - which firms use to set discount rates for pension liabilities - have led to many companies using a lower and more prudent discount rate than indicated by market yields.

KPMG suggested this might be because the high credit spreads have raised concerns among employers about excessive volatility in its pension fund if the quoted yields are used for calculations. Buut the pensions and accounting consultancy warned this approach is adding around £30bn to private sector pension liabilities in the UK.

In addition, the survey of 300 companies revealed that while firms are using more up-to-date life expectancy rates to calculate the impact on pension benefits - with an assumed increase of just over half a year in 2008 compared to three years in the period 2004-07 - there is the suggestion that actuaries may have "overestimated the problem".

KPMG's report suggested the decline in assumed life expectancy indicates companies might feel they are making an appropriate allowance for increasing longevity, but it argued 35% of firms are effectively assuming life expectancy improvements will continue indefinitely, resulting in an extra £10bn being set aside.

Mike Smedley, pensions partner at KPMG, said: "Recent financial turbulence has led to criticism of IFRS as a measure for the liabilities of company pension plans, mainly because of the significant increase in corporate bond yields pushing down liability measures. However, our survey suggests companies are currently reserving £30bn more than raw bond yields suggest and £10bn for uncertain future mortality improvements."

The report meanwhile also examined the potential impact of proposed changes to International Financial Reporting Standards (IFRS) for pensions, including plans to abolish the use of expected returns on pension assets in favour of actual returns, and to begin reserving funds for future defined benefit (DB) running costs rather than operating a pay-as-you-go system.

The findings suggested that removing the "boost to profits" of expected returns on pension assets could wipe around £50bn from company profits, while assuming an average level of DB expenses of 2.5% of liabilities, the decision to pre-fund the costs could add a further £20bn to balance sheet deficits. 

It claimed this might make it "more likely companies will continue to close gold-plated DB plans or find other ways to reduce the associated cost and risk".

Smedley admitted: "Trying to ensure there is enough in the pot to provide for large numbers of people for several decades is a real challenge to both companies and trustees."

However, he warned that while "some commentators have criticised accounting measures as understating the liabilities, trustees and advisers should not assume that companies' accounts understate the true liabilities as companies are clearly already reflecting current market conditions".

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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