Pension schemes in the UK could be scrapped and future fund plans jeopardised, if recommendations by the UK Accounting Standards Board (ASB) that funds be valued on a US style market value system are adopted.

The grave concerns voiced by the UK's National Association of Pension Funds (NAPF) and UK pension fund managers follow proposals in a discussion paper by the ASB, which wouldspell the end of the current actuarial approach employed for UK fund accounting, which smooths out a company's pension assets against its liabilities.

Instead, a discount scheme would come into operation, relative to the pension scheme's market worth, in order to calculate a fund's liabilities.

However, resulting fluctuations in company profit and loss records from such an accounting reform, could spell great danger for UK pension schemes, the NAPF argues.

John Rogers, director of investment services at the association, says: With pension fund directors unable to work out their exact costs, they certainly will not want to set up any further schemes, and indeed there is the possibility they may even consider closing their existing ones."

Rogers believes such accounting reforms will also hasten the move to DC schemes by pension funds in an effort to dampen this volatility.

Allan Cook, technical director at the ASB is aggrieved though at the NAPF's 'strong' reaction to the discussion paper: "We feel the NAPF has rather overblown things and don't know how much they have understood the main thrust of our argument. Despite the suggested move to a market value for pension fund assets, we want to contend with issues of volatility, and the discussion paper is about ways of doing this. The accusation that we are blindly barging ahead, regardless of an apparent belief that this will bring UK pension funds to their knees, is certainly not fair."

Steve Mingle, group benefits and pensions director at Diageo, the UK drinks giant formed from the merger of Guiness and Grand Met, expressed his fear though about such reforms: "Companies that can't withstand the volatility inherent in any switch to market valuation will almost certainly abandon present DB provision for DC, with the ensuing result that many people will have inadequate income for their retirement.'

Chris Lewin, head of UK pensions at Unilever, is more pragmatic: "Obviously the key question here is volatility and if the change to a market value leads to any sign of unpredictability in a company's profit and loss accounting, then this could spell bad news for both pension fund and employee."

Unilever professes to not being overly worried by the proposals and believes the ASB will make any necessary amendments to ensure such a move is carried out reasonably.

Cook explains that the ASB felt existing accounting standards were in need of updating, both to meet advancing international standards, which already operate on a market value system in the US and much of Europe, and also to ease public information. This, he says, is becoming increasingly demanding due to greater emphasis on transaction costs and awareness of the minimum solvency rate.

He also says the ASB wishes to calculate any discount system for liabilities on equity returns, flying in the face of international agreements which are sticking to government bond rates, in order to find an acceptable answer to the volatility question.

"We have a number of solutions, including the suggestion of transferring the liabilities into the total recognised gains and losses account, which we hope will meet with constructive commentary before our deadline of October 23," Cook says. Hugh Wheelan"

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