HBOS claims new accounting standard will lead to pensions malpractice of ‘Maxwellian’ proportions
Senior executives at Edinburgh-based banking group HBOS have attacked a new accounting standard as “iniquitous, foolish and seriously flawed”.
They claim it will make it far harder for companies to provide staff with decent pensions, would cause City investors to be misled, and will lead to business malpractice of Maxwellian proportions.
Peter Burt, executive deputy chairman of HBOS, said: “The great danger is that it [the new FRS17 accounting standard] actually opens the door to Maxwell- type manipulation. By this change, the accountants are enabling [corporate executives] who shift at the right time to actually add a big wodge to their reported profits.
“FRS17 poses real problems for defined benefit schemes. It’s a classic case of the accountancy tail being allowed to wag the dog. It’s a much more expensive way of providing results.”
FRS17 was introduced by the UK’s Accounting Standards Board (ASB) this year and championed by Sir David Tweedie, the board’s former chairman, who now chairs the International Accounting Standard Board. However, the standard does not become fully effective until 2003. A key requirement is that firms will have to declare in their annual accounts the true cost of maintaining their occupational pension schemes.
With equities down 18% this year, it is expected to leave many companies with serious holes in their accounts.
James Crosby, chief executive of HBOS, whch was formed just over two months ago through the merger of Halifax and Bank of Scotland, said: “If you’re a financial services business like us, salaries represent roughly half your cost base. As a means of putting your cost base up for ever and a day by 5%, this is great. But as a means of achieving anything else, it’s seriously flawed.
“The contribution rate on a typical scheme, that is 80% invested in equities, is equivalent to 16% of the salary roll. If it’s invested in bonds, the rate is more like 28%.
“The whole nature of occupational pension schemes, particularly post Maxwell, is that the trustees are independent of the management. What the accountants are now saying is that a company should take — through its profit and loss account — movements on the investment surplus of a pension fund.”
Crosby added that such movements are not trading liabilities and the sponsoring company does not have any control over them. It is the trustees of a pension fund — not a company’s board of directors — who decide where to invest.
“We have a strong prejudice against making this move based around long-term value creation for our shareholders. The supposition at this point is that the market will discount the move on the basis of P&L and that the Boots camp will be a very small one.”
Largely as a result of FRS17, Boots, the chemists chain, recently declared it had withdrawn its £2.3bn pension scheme from the equity markets and reinvested the cash in AAA-rated government bonds.
Burt said: “The bad news is this is so esoteric a subject that the politicians can’t understand it, so they’re tempted to go along with the ASB as opposed to stamping on them very hard and saying this is ludicrous.”
The ASB is not taking such criticism lying down. Allan Cook, the board’s technical director, said: “What we are doing is moving into line with US and International Accounting Standards Board practice.”
He said Crosby was “mixed up” about the new FRS17 standard. Changes in the value of the pension fund will not go into a company’s profit and loss account, said Cook, but into a “statement of total recognised gains and losses”. He said this comes between the P&L account and the balance sheet.
The new standard was necessary because too many occupational schemes were investing in an asset class —UK equities — whose movements are uncertain and risky. “And they are not telling their shareholders about that risk,” he said.
Gareth Derbyshire, an actuary and director of Morgan Stanley’s European pensions group, backed Cook’s stance. He said: “The old way of doing it made equities appear less volatile than they actually were
This article was published in the Sunday Herald on 23 December 2001