FT: Pensions without paternalism

20 November 2001

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The switch from defined benefit to defined contribution schemes reflects a deeper shift in the nature of the company. Within a few months, British companies will have to start complying with a new accounting standard that could kill off the traditional British pension. But if that happens, the death of long-standing final-salary pensions will be a result not of accounting technicalities but of a fundamental shift of attitude on the part of company managers.

Financial Reporting Standard 17 will start to affect the year-end balance sheets of companies reporting their annual results in the spring. It is a clearer way of accounting for pension liabilities. But it requires a company to show on its balance sheet the market value of its pension fund's surplus or shortfall of assets compared with liabilities. At a time when equity prices are below their peaks, the impact of FRS 17 on corporate reporting could be unpleasant for companies with poorly funded pension schemes. In an extreme case, the consequent weakness of the company's balance sheet could prevent it from paying dividends to shareholders.

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This FT comment is based on the recent article of Graham Bishop 'Son of MFR - FRS 17: Mother of all Distortions — or New Reality?

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