Study Finds UK Pension Accounting Does Not Capture All Risks

June 27, 2008 ( - Giving employers 20 years instead of 10 to bring their pension plans up to full funded status would allow U.K. companies to cut their annual pension contribution rate by 94%, a new study found.

A Financial Times story said the Association of British Insurers’ (ABI) study also found that   making no additional employer contributions to a plan that is underfunded raises dramatically the probability that it will become insolvent before all benefits are paid out – to 17% from 3% for a plan for which the employer is topping up contributions.

The study found that plans investing 60% in risk assets – mostly equities – have a far higher chance of becoming fully funded within 15 years. However, the study found that, in the worst 5% of possible outcomes, the plan would run out of money by 2045 – long before all benefits were paid.

The newspaper reported the ABI, working with Fathom Consulting, an economics consulting firm, looked at the risks and uncertainties associated with workplace pensions and concluded that current accounting disclosures fall short in capturing all of the risks and costs that defined benefit schemes imply. “What we are showing is that there is no one right answer (for disclosing pension liabilities),” Peter Montagnon, ABI director for investment affairs, told the newspaper.

Currently, the UK Accounting Standards Board is looking at its key rule for disclosing pension assets and liabilities, FRS17, which has attracted criticism because too often it fails to capture fully the risks to the employer.

Among other factors, it discounts future liabilities by the rate on a double A-rated corporate bond rather than the risk-free rate available on government instruments. This produces a smaller calculation of plan liabilities than otherwise would be the case if the employer sought to shift its pensions risk to an insurer, researchers found.