A report prepared by the Leeds University Business School found accounting standards used now to estimate assets and liabilities of UK schemes undermine pension provisions.
Current accounting standards bring volatility in the short-term pension surpluses and deficits of companies since assets are marked to market on a daily basis, the report, commissioned by the National Association of Pension Funds (NAPF), found.
The regular valuation of assets is at odds wit the long-term investment philosophy of pension funds, which seeks to create wealth over long periods of time, the report observed.
“The current standards are not appropriate for the long-term nature of pensions. They allow short-term stock market volatility to perversely affect pensions and their long-term strategy by presenting large deficits which may prove inaccurate in the long-run,” said Lindsay Tomlinson, chairman of NAPF.
As a result of market volatility and accounting practices, firms have closed down viable pension schemes and become extremely cautious, the Accounting for Pensions report said.
Excessive risk-aversion has resulted in increased pension provisions for companies and misallocation of assets in the economy through higher investments in low-yield government bonds, the report said.
Preference for safer government securities has further complicated the matter as funds are exiting equity investments, supporting the private sector less when it faces a real threat of a double-dip recession.
“For too long accounting standard setters have focused on the theory rather than practice and there has been a vacuum of accountability. Accounting standard setters, both in the UK and internationally, need to have a real world approach that truly takes into account the economic consequences of their actions,” the report observed.
Pension liabilities should be calculated as the net present value of future asset-liability cash flow, allowing for the asset-liability interaction over the life of the pension scheme, the report recommended.
The NAPF has been advocating for a different accounting standard for long and commissioned a review early last year.