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Surplus, what surplus (part 4)?
Yet more changes to pensions accounting are in the pipeline. Proposals, shortly to be considered by the International Accounting Standards Board (IASB), which gave us IAS 19, the subject of the proposals, have been published by the UK’s Accounting Standards Board (ASB).
The suggested changes, which would ultimately amount to larger reported deficits and increased volatility in sponsors’ financial statements, comprise discounting scheme liabilities by a more conservative “risk free” rate (essentially the rate used by buyout firms and arguably the rate that reflects the true cost of pension scheme provision), rather than using the AA corporate bond yield, the removal of the IAS 19 “corridor”, which currently permits some smoothing of deficits in the sponsor’s accounts and the inclusion of actual, rather than expected, asset returns in the company’s profit and loss statement. On the plus side, however, liabilities will exclude the assumed future salary growth of current employees.
Estimates of the potential adverse effect that these changes could have on reported scheme deficits have been put at £84bn for the FTSE 100 and £120bn for the UK’s top 200 companies. This is, of course, notwithstanding the additional £75bn or so that would be further added to reported deficits from revising longevity assumptions in line with the latest actuarial “medium cohort” improvements. Talking of which…
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Deflated liabilities
Yet more good news. The falling prices paid for pension scheme buyouts has meant that the valuations applied to scheme liabilities by the Pensions Protection Fund (PPF) for the purposes of determining the PPF levy paid by a scheme will similarly decline, with effect from the 2009/10 financial year. The rationale for this is that schemes can more readily turn to the buyout market than rely on a PPF bailout.
All out at sea
And the good news just keeps coming. The Pensions Regulator has been successful in forcing Bermudan-based Sea Containers – which filed for Chapter 11 bankruptcy in the US in October 2006 – to make payments into two pension schemes of the company’s UK subsidiary. The Regulator, drawing on its anti-avoidance powers, issued its first ever Financial Support Direction (FSD) against Sea Containers last June. The exact amounts have yet to be agreed not least because the company also has $380m of bondholders to satisfy.
And finally…
You may remember the jibe about British Airways being the pension fund with the airline attached, given the size of its pension scheme liabilities in relation to its market value. Well now BT, with its £39bn of pension scheme liabilities – the UK’s largest - and an £18bn market value, has become known as the pension scheme with the telecoms business attached.
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Live and let live
The Pensions Regulator will be adding imprudent longevity assumptions built into scheme liabilities to its existing “triggers” when deciding which schemes to investigate. Currently, the Regulator’s radar focuses on levels of scheme funding and the deficit recovery period. That said, sponsors wrestling with the vagaries of longevity risk might be heartened to learn that…
Dicing with death
Lucida, the pensions insurer, is to use a longevity swap linked to the JP Morgan LifeMetrics Longevity Index, launched in March 2007, to protect its annuity book. The index allows the “trading” of longevity by enabling counterparties, matched by JP Morgan, to take a view on longevity trends.
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