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BAE Systems highlights problems with FRS17 calculations

According to UK defence manufacturer BAE Systems' annual results yesterday, its pension deficit doubled last year to £3 billion, half its stated assets of £6.14 billion. But this figure is misleading for both shareholders and employees.

Nothing changed last year in the way BAE funded its pension plan. In fact, the amount employees contribute rose from around 3% to 5%. But two adjustments to the way the pension deficit is calculated added £1.5 billion.

An actuarial analysis of employee longevity that takes place every ten years increased the average pension period for a retiree at 65 from 16 to 19 years, adding £800 million to the deficit. And a change in the UK discount rate for future pension payments added the other £700 million.

Group finance director George Rose pointed out that: "FRS17 makes these calculations very volatile. A change of only one percentage point in the UK discount rate would add another £2.1 billion to our deficit. Plus the calculation of our assets is taken from the current value of the stock market, which is obviously subject to change."

Even with the new, £3 billion pension deficit, Rose says that for the next 20 years there will be nothing but inflows into the pension fund.

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