Ah! Pension funds. Those oh-so-desirable investors who are the acme of good shareholder form. They invest for the long term. They don’t panic and sell at the merest hint of a hiatus in profits or revenue growth. And their focus is more actuarial than quick-buck.
So that’s a good thing. Because they’re just the sort of investors who might be willing to sit through the temporary hiccups caused by a small accounting change being introduced in the UK with worryingly far-reaching repercussions: FRS17.
Financial Reporting Standard number 17 has certainly humbled some ostensibly innocent UK blue-chips. BT, Abbey National, and Marks & Spencer have all abandoned their defined benefit pension schemes in favor of defined contribution schemes, citing FRS17 as the trigger.
FRS17 changes the way companies disclose pension liabilities. Doom mongers suggest this could even lead to dividend cuts at some companies or breaches of banking covenants. It hasn’t changed the situation they’re in; just the way they present the situation. FRS17 requires companies to include a snapshot calculation of their pension obligations in their financial statements, based on current asset values. For some, this means surpluses now showing up as deficits – although these could easily turn back into surpluses if equity markets pick up again.
But how does all this affect investor relations officers?
Let me count the ways. First, most IROs are still hoping to retire on healthy final salary-related pensions. They should perhaps make additional arrangements.
Second, they have to persuade investors that, notwithstanding FRS17, nothing has really changed. Accountants will keep arguing whether this is a better or worse way of describing a company’s financial picture. But even they will admit it doesn’t change the picture itself.
And third, and most important, FRS17 has thrown a much longer-term and more profound series of structural economic and demographic developments into sharp relief.
And this is something that really should worry IROs. The calculation they should be seriously vexed about is this: low inflation + uncertain stock markets + aging baby boomers = tough for pension funds to meet their liabilities.
So for IROs there’s more to worry about than their personal pension prospects or, for those in the UK, explaining the impact of FRS17. Their problem is going to be finding shareholders to supplement the now shrinking pension fund equity portfolios they could always rely on.
As more and more pension funds change their spots – by exiting the equities market altogether, as Boots recently did, opting exclusively for bonds; or by reducing their own commitment to provide fully-funded defined benefit schemes, leaving individuals to take more care of themselves, thereby fragmenting pension investments – IROs may have to retrain as debt-holder relations officers; or learn how to love the fly-by-nights.
