Pension funds are not being served by accounting standards that “create fake stability by smoothing out problems over the years”, delegates heard.
Speaking at the National Association of Pension Funds (NAPF) Investment Conference, International Accounting Standards Board (IASB) chairman Hans Hoogervorst (pictured) said a better approach to accounting for pension schemes was a standard that reflected economic reality as “accurately and timely as possible” in order to “nip problems in the bud, rather than allowing them to fester on”.
He said while this was a bitter pill to swallow in the short-term given the current unprecedented global monetary policy backdrop, it was better than smoothing the problem over a longer period of time.
The IASB recently amended IAS 19 by removing the so-called ‘corridor method’ of deferring the recognition of actuarial gains and losses. As a result, the balance sheet pension asset or liability now represents the actual funding position.
Hoogervorst said while he could understand the viewpoint of many that current standards relied too much on fair value measurement, led to too much market volatility and did not serve schemes’ long-term perspective as long-term investors, he did not agree with this view.
He added: “Short‑termism is rife across the financial markets. Markets can get things very wrong and for very long periods of time. The efficient-market hypothesis has been rightly discredited. So the long-term investor should not be deterred by short-term market fluctuations and investment fads.”
He said providing accurate and current information in accounting was important in order to distinguish between short-term fluctuations and long-term trends, especially with mounting pressure on business models from unorthodox monetary policies.
He said: “It is hard to distinguish between what is a short-term blip from something that is the beginning of a long-term trend. That is why, in accounting, providing current information—and not just historic cost—can be so important. Both investors and managers are best served by accounting standards that reflect the economic reality, not by standards that create fake stability by smoothing out problems over the years.”
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