NAPF calls for overhaul of retirement accounting

Accounting standards are undermining companies' pension provision in Britain, a report commissioned by the National Association of Pension Funds argues today.

The report, by academics at Leeds University Business School, says current standards are inappropriate for assessing pension funds' long-term liabilities and can have unintended knock-on effects.

Dr Iain Clacher and Professor Peter Moizer argue in their paper that there is a mismatch between valuing assets based on market prices and liabilities based on bond yields that makes pension surpluses and deficits extremely volatile. They argue that this volatility has prompted companies to close viable final-salary pension schemes and to switch investments to lower- return assets.

The academics add that this has led to an increase in the cost of providing pensions and misallocation of investment in the economy away from companies into government bonds. They propose changing the calculation of liabilities to a discounted cash-flow model.

Dr Clacher said: "If you discount at the rate of an AA bond yield you push investment away from equities, which are good over the long term, to bonds and this increases the cost of provision."

However, John Ralfe, a pensions consultant who moved Boots' scheme into bonds in 2001, said: "Why on earth are the NAPF trying to raise this now? It's a battle they lost 10 years ago. You can't say we will take these risks and they aren't risky. Equities are risky."

Lindsay Tomlinson, the chair-man of the NAPF, said: "After the event I'm going to be proved right but we are not going to win this argument."