Stewart Ritchie, director, Pensions Development Scottish Equitable Sir, Paul Newton's article...
Stewart Ritchie, director,
Pensions Development Scottish Equitable
Paul Newton's article about pension deficits (IW 19 May) is helpful and timely, but does it go far enough? The deficits are measured on FRS17, but this discounts the liabilities using AA bond yields. A solvency basis equivalent in strength to a life office guarantee might be closer to a long gilt yield minus half a percent, and would produce deficits of perhaps twice or three times those of FRS17.
If the market is going to use the weaker FRS17 measure in valuing a company's shares, it should be very clear why. Is it because the company can walk away from part of its pension promise?
If so, perhaps the market should consider the circumstances in which this would happen. For example if it would happen only when the company was in dire straits, this is effectively saying 'I will take positive credit for an event which would by its nature mean a low share price.'
Is the rationale instead that the company pension scheme will obtain a higher yield than gilts? To the extent that the market is composed of equity fund managers and analysts,this is perhaps an article of faith, but does involve risk that should be recognised.
Perhaps the least satisfactory reason for using FRS17 is that solvency figures are not available. But as the Financial Times reported on 17 May, that problem may soon be corrected.
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