CBI slams 'misleading' pensions rule

THE CBI has stepped into the row over the controversial accounting rule FRS 17, which forces companies to reveal shortfalls in their pension funds, as another FTSE 100 company reports a massive slump in the valuation of its final-salary scheme.

BP's £12.6bn pension fund, the biggest in the country, has slipped from a funding ratio of 120% to 96% of its liabilities in the past 12 months, according to its annual accounts. The oil giant says the fall, caused by the drop in value of its stock market investments, will not force it to close its scheme to new members, although several other Footsie companies have taken this step and blamed FRS 17.

Digby Jones, director-general of the CBI, has launched a campaign to change the rules. In a letter to the Accounting Standards Board he argues that FRS 17 values pension assets in a misleading way.

He suggests that companies should be allowed to base the valuation of their pension assets on the average market value over a period of up to three years. Under present rules companies must fix the value of the fund on a particular date, reflecting short-term fluctuations in the markets rather than ability to meet payments over a long period.

Jones directly equates the move away from final-salary schemes with the introduction of FRS 17. He also warns that it may encourage fund trustees to adopt short-term performance measurements. In his letter he says: 'It is right that the users of company accounts should have access to transparent information, but FRS 17 is misleading and introduces a degree of volatility into company accounts that fails to reflect the realities of pension scheme financing.' The CBI is also concerned that companies are switching out of equities.

Some 72% of the BP's UK fund is held in British equities. This is unlikely to change. BP's finance director is also a non-executive director of Boots and is said to have opposed the decision by the retailer to switch all its pension investment into bonds last year.