UK Pension Body Discusses New Liability Rate

December 11, 2003 ( - British companies are facing an even more stringent measure of their pension liabilities that could raise the estimates of the nation's retirement savings shortfall by 20%.

Under plans being drawn up by ministers for the UK Pension Protection Fund – the government’s new safety net for company pension plans – businesses would be judged by an even more rigorous standard then they will be under the already contentious FRS 17 accounting measure, according to a Financial Times report. FRS 17 has already led to ballooning estimates of the scale of pension liabilities (See  Study: UK Corporate Pension Deficit Doubles ). Experts are warning that the latest move could further hasten the closure of final salary plans and drive pension investments out of equities and into gilts.

Under the new proposals, PPF plan liabilities will be calculated using a rate equal to 0.5% below yields on UK government gilts. This compares with the substantially higher rate on AA-rate corporate bonds used for FRS 17.

The interest rate used to measure future pension liabilities determines the size of the shortfall. If it assumes that investments will earn higher interest rates, the size of any liabilities will shrink, but lower rates of return will inflate them. The rate proposed for the PPF was selected because it equals that available on an annuity that would have to be bought to ensure that each promised pension will be paid in full.

FRS 17 was devised by accounting bodies as a means of helping investors better understand the size of a pension surplus – or shortfall – by crystallizing the gap between the assets and the present value of future liabilities.

A spokeswoman for the Department for Work and Pensions said that no decision has yet been made over how to calculate the levy.

The new PPF was proposed after FRS 17 revealed yawning gaps in the pension funds of some employers. Workers who are members of several plans are already asking the government to make up the shortfall. All employers with final salary plans will have to contribute to the PPF, but 80% of each company’s contribution will be determined by the gap between the value of assets and liabilities. The remainder will reflect the size of the plan.