Current pension scheme accounting standards encourage short-term investment attitudes and need to be changed, according to the Marathon Club.

The investment lobby group says that alterations to IAS19 are needed if scheme disruption and the unnecessary threat of defined benefit (DB) scheme closure is to be halted.

The Marathon Club has identified two areas in the accounting standards which can cause damage to pension schemes. The first is the requirement that all assets are marked to market value on the balance sheet date (unless they are intended to be held until maturity), and the second is the rule which forces the value of future liabilities to be discounted at a single rate determined by the yield of AA corporate bonds with the same maturity date.

The group has submitted a paper to the International Accounting Standards Board (IASB), called Issues Requiring Changes in the Accounting of Pension Funds, in which it outlines its proposals for change.

"In the Club's view, current accounting practice is unhelpful, potentially damaging and arguably incompatible with the requirement to prepare accounts of a business as a going concern," commented Roger Emerson, current chair of the Marathon Club. "Prescribing a valuation approach for pension funds in company accounts on a basis more appropriate to termination is becoming self-fulfilling.

"We recognise that changing IAS19 will not be easy. However, if we are to stem the kind of short-termism which the current standard creates, significant change is necessary. We are, therefore, urging the accounting profession to enter into a constructive dialogue with the end-users of company accounts to produce accounting rules which are fit for purpose."

The paper and the Club said appropriate accounting should result in assets shown at fair long-term values, and liabilities calculated as the net present value of future benefit commitments and other outgoings. These liabilities would, the paper says, be discounted at a rate consistent with the valuation of the assets.

The paper is available here, and is open to feedback.

- Pensions Age July 2009

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