NAPF proposes tighter pension accounting standards for corporates
The UK's National Association of Pension Funds (NAPF) has proposed that future salary expectations be removed from pension scheme accounting standards. At the same time, it has advocated a move away from AA-rated corporate bonds to discount future liabilities. In a paper released entitled Accounting for Pensions, the NAPF argues that since companies do not normally have an obligation to increase future salaries, the benefit obligation should therefore no longer reflect estimated future growth in salaries.
The paper instead proposes that the accrued liability should be provided for in the present and that projected liability ? including salary increases ? should be disclosed in the notes to accountants.
In addition, the paper also proposes that liabilities should no longer be discounted at AA corporate bond rates, but rather at a risk free rate derived from interest rate swaps. It argues that this would better match scheme liabilities with current practices.
The issue of pension schemes for corporates is not likely to go away, especially given the prospect of tighter accounting rules. Take for example the UK postal service, the Royal Mail. The company has a pension scheme deficit of £2.5 billion ($4.6 billion) which, under the more stringent accounting method FRS 17, would actually show up as £4.6