LONDON - A revolution is taking place in the U.K. pensions industry, and those at the vanguard are blaming the accountants.
A large number of U.K. companies are closing their defined benefit plans to new and, in some cases, existing members and setting up defined contribution arrangements instead.
And the long held "equity cult" is quietly being abandoned as pension plans such as AstraZeneca PLC Pension Fund, London, and Balfour Beatty Pension Fund, Prescott, move to increase their allocations to fixed income to up to 60% of plan assets.
High-profile defined benefit closures include:
* Iceland Group PLC, Deeside, closing its L577 million ($824 million) defined benefit plan in favor of a defined contribution scheme;
* Ernst & Young, London, closing its L381 million defined benefit plan and opting for a defined contribution scheme;
* the L800 million Nationwide Building Society, Swindon, which is closing in favor of a defined contribution plan for new employees;
* the L2.7 billion J Sainsbury PLC Pension Scheme, London, closing to new members, who will be able to participate in a new defined contribution scheme;
* the L3.1 billion Marks & Spencer Pension Scheme, London, also closing to new members in favor of a defined contribution plan; and
* the L12.9 billion Barclays Bank Retirement Fund, London, which likewise is being shut down and being replaced by a defined contribution plan.
Blame FRS 17
The reason, according to plan sponsors, is a new accounting standard, FRS 17. They say the standard has made it too expensive and risky for them to continue to provide defined benefit pensions.
FRS 17, similar to but stricter than the United States' FAS 87, requires companies to value annually their pension plans in the profit-and-loss statement. No smoothing of pension assets and liabilities is allowed and liabilities are discounted against AA corporate bonds.
"Bringing snapshot accounting into the accounts of the sponsoring company will not only invite confusion among investors, but will inevitably lead firms to question whether it is worth their while continuing to offer a good quality final-salary pension scheme," said Peter Thompson, chairman of the National Association of Pension Funds, London.
He said more than three-quarters of U.K. companies offering final-salary pension schemes were less likely to do so under the new accounting standard, according to a poll taken by the NAPF.
By June 2003, all U.K. companies will have to include the real value of pension assets or liabilities in their profit-and-loss statement.
But consultants say FRS 17 is being used as a scapegoat as plan sponsors wake up to the true costs of providing defined benefit plans.
"FRS 17 has accelerated many of these changes in U.K. pension plans, but companies have been concerned about the risks of running pensions for some time," said Tim Keogh, European partner for William M. Mercer, London.
The introduction of the accounting standard comes at a time when defined benefit pension reserves have been eroded by two years of poor investment performance, and companies face the end of contribution holidays.
Pension plans also have become increasingly mature; in 20% of the U.K.'s top 500 listed companies, the pension fund is larger than the market capitalization of the sponsoring company.
With little or no resistance from new plan members over their pension benefits, finance directors of U.K. companies have taken the opportunity to reduce and even remove a potential risk to their ongoing business.
In five years, defined benefit plans will have become a "substantial minority" of U.K pension plans compared with their dominant position in the market at the moment, said Mercer's Mr. Keogh.
Questions `yearly snapshot'
Desmond Mac Intyre, director of Deutsche Asset Management's pensions strategy group, London, regrets the new accounting standard requires such a "yearly snapshot" of a long-term liability.
But he welcomes the new standard for its transparency. "How sustainable are these pension promises if they are not backed by real assets? You can't fault the objectives of FRS 17," he said.
He believes implementation of the new standard will see the average equities allocation by U.K. plans fall to around 55% of total assets from 71% now as plans try to match their liabilities.
Boots Co. PLC Pension Scheme, Nottingham, last year moved its entire plan into long-term bonds to reduce as much as possible the risk to the company from its pension promise (Pensions & Investments, Nov. 12, 2001). John Ralfe, head of corporate finance for the group, maintains the plan's radical move was to reduce corporate risk and was not the result of the new accounting standard.
"The great thing the accountants have done is to make it clear that the lowest risk investment for long-term pension funds is in bonds. The accounting standard is a breath of fresh air," said John Shuttleworth, pensions partner at PricewaterhouseCoopers, London.