A week ago it was possible to report that UK pension funds were in surplus.
A week's a long time in the financial markets. They're not in surplus any more.
This shows several things. First how irrational markets are. Second how daft we are to base our economy on such a fickle foundation. Third that we're mad to build this volatility on the price of second hand pieces of paper (because that's all that shares are) into our accounting systems.
But we do. FRS 17 is the UK accounting standard that requires that;
- pension scheme assets are measured using market values
- pension scheme liabilities are measured using a projected unit method and discounted at an AA corporate bond rate
- the pension scheme surplus (to the extent it can be recovered) or deficit is recognised in full on the balance sheet.
International standard IAS 19 follows the requirements of this UK standard.
So a week ago companies were rubbing their hands in glee - their net worth was going up because the value of their shares was rising. Now they're going to report big losses because the value of their shares is going down. That means that instead of investing in real goods and services that our economy needs they'll be buying their own shares (or at least, each others shares) in a vain hope that this will fill their pension deficits. But the market has already said it doesn't value these, at least as much as it did. So the attempt to fill the pension gap will fail, and the downside will be exaggerated.
You can see the cycle can't you? FRS 17 makes a bubble bigger. It guarantees the downside is more like going bust. And all of it reinforces the IASB view that all that really matters about our companies is the financial speculation that can be undertaken in their shares: what really happens in our economy of which they are a major part does not matter to accountants or users of financial reports according to the IASB: it's only the financial trade that counts.
This is madness. Those financial trades are precisely what does not matter in our economy. Let's take the chance to realise this. Let's start by ending this pension accounting madness before it causes real harm as this downside gathers pace. Then let's talk about what's really needed if we are to create long term stable pension funds. And maybe we'll talk along the way about accounting for what's really valuable, and not what suits the City. Because candidly sometime soon I really do hope that some people are going to realise that Aristotle was right when he said you can't make money out of money.
It's going to be a tough lesson for the UK to learn.