Trustee body attacks IAS 19

Rules forcing pension funds to value their assets at market prices and discount their liabilities in line with corporate bond yields are accelerating the pace of scheme closures and should be reviewed, according to an influential industry grouping.

The Marathon Club, comprised of trustees and senior executives representing schemes with £170bn ($279bn, €196bn) of assets, is calling for an industry debate over the future of the International Accounting Standards Board’s controversial IAS 19 standard.

The club asserts that IAS 19, which stipulates that all assets not being held to maturity are subject to mark-to-market valuations and future liabilities are discounted in line with often volatile double A bond yields, can lead to “spurious” estimates of pension fund deficits, creating an “increased and unnecessary threat of defined benefit scheme closure or disruption”.

“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,” said Roger Emerson, 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.”

The Marathon Club is calling for accounting measures that allow assets to be measured at “fair” long-term values and liabilities to be calculated as the net present value of future benefit commitments and other outgoings discounted at a rate “consistent” with the valuation of the assets.

The club is hoping to spur the accounting profession into a search for alternative valuation approaches that recognise the long-term nature of pension schemes.

Among its suggestions is that a dividend or earnings discount model might be a better basis for asset valuation than the “blind” application of market prices.

On the liability side it argues that a discount based on a rolling average of corporate bond yields, similar to a measure being proposed in Germany, could have some validity.