Citigroup: UK Pension Accounting Change Means Higher Earnings for Some

January 27, 2005 ( - New Citigroup research predicts that pension accounting rules changes could improve earnings at almost a third of large UK companies.

Reed Elsevier, British Airways, Reuters and Capita would see their earnings boosted while losers would include Rolls Royce, Daily Mail & General Trust and Hanson, according to the research. The research said those reporting earnings increases will see a 4%-hike while those reporting an earnings decrease would see a 5% retreat. In total, more than 32% of companies studied by Citigroup will see higher earnings.

Citigroup said that “enhanced returns in 2004 will reduce the pension cost for even more companies as larger expected returns on plan assets are reported as income in the balance sheet.” The research argued that the balance sheet impact of the new rules is already priced in by the market – but that the earnings impact has been neglected.

It said in a research note: “In many circumstances due to the fact that certain pension losses can be taken to equity on transition to IFRS, this earnings number may well increase. Our 2003 data (which is the latest available for many companies) shows that this will happen for 32% of our sample.”

Citigroup said many in the UK pension community have focused heavily on new International Financial Reporting Standards that require balance sheet recognition of pension plan deficits, but that few have tried to understand the effects of the accounting change on earnings.