Changes to the international accounting standards (IAS 19) could change asset allocations and lead to lower risk investment strategies for pension plans, warns Mercer.
The financial consultant is concerned that the proposals, which are due for consultation, could also wipe £8.7bn off of UK corporate earnings.

Should the proposal be implemented, the replacement of the current form of 'expected return on assets' in the pension aspect of profit or loss would cause many CFOs to look at their investment strategies for company pension plans.

Warren Singer, UK head of pension accounting at Mercer, said the proposal would see companies no longer automatically rewarded for taking investment risks through their pension plan assets.

"Currently, a pension plan that is heavily invested in equities will report a higher expected return on assets and a lower pension charge to profit or loss than a plan taking no investment risk - even if the actual return on equities over the accounting period is poor. The proposed change would mean a removal of this incentive for CFOs to support investment in equities."

Should the change apply to the accounts of all sponsors of UK pension schemes, Mercer said £8.7bn could effectively disappear from annual reported profit or loss (before tax), based on current asset allocations. This removes the current boost to profit or loss from the expectation that long-term investment returns on pension assets will be higher on equities than bonds, although the UK has seen equity returns underperform bonds by around three per cent a year over the past decade. This, Mercer said, is an issue that is not necessarily on the radar of many other investors.

"The proposals, if implemented, will cause CFOs to reassess the pros and cons of the risk taken with the pension plan's investments," added David Fogarty, European head of Mercer's financial strategy group.

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