View from City Road: How much is a pension fund worth?

Apension fund should be easy enough to value, surely? It consists of assets that for the most part have a market value. All a valuer has to do is add up the parts on a particular day.

Not so fast. A valuer also has to know what the liabilities are. Not only must he know what pensions the fund pays now but how they are likely to rise in the future. The pensions industry uses three different ways of valuing a pension fund and any surplus. Take Courtaulds, the chemicals company, which yesterday confirmed it was transferring pounds 50m from its fund to its own coffers.

Its surplus ranges from pounds 173m to pounds 301m, depending on who measures it. The government actuary provides the lowest figure; actuaries provide the middle one of pounds 189m; while accountants are responsible for the highest one. Can they all be right? Confusingly the answer is yes, as their valuations depend on different assumptions. Take salary increases. The government actuary's methods assume rises of 7 per cent, the accountants 7.5 per cent and the actuaries 8 per cent.

There is a larger spread of assumptions on dividends. The government actuary assumes 3.5 per cent growth whereas the accountants assume 5.5 per cent.

Have the accountants - following SSAP24 - thrown caution to the winds? Are they deliberately overstating surpluses so companies can boost their profits? They are allowed to spread surpluses over the average remaining working life of their workforce. Courtaulds' profits have benefited by pounds 21.2m a year but, ironically, the pension boost will fall next year as the interest received on the cash transfer will not fully compensate for the SSAP24 credit.

The accountants' assumptions on both salaries and dividends are safely below increases in the past, so it looks as if even they have been reasonably cautious. On this basis, the government actuary and the consulting actuaries look over-cautious.

Indeed, this turns out to be the case. Take real dividend growth. The actuaries' shared assumptions imply a fall in real terms of 1.5 per cent, which would imply the death of capitalism. If the government actuary really believes this, we should all be told.