Inflation doubts dog pension liabilities

LONDON (Reuters) - Many FTSE 350 companies may be overstating their pension liabilities due to uncertainties over long-term inflation rates, consultant Mercer said on Thursday.

Overall, variables underpinning pension schemes' inflation assumptions may have led to miscalculations of as much as 40 billion pounds among the index's constituent companies, with some overstating and others understating their liabilities, it said.

Pension schemes use factors including inflation, pay rises, longevity and the yield on high-quality corporate bonds to determine their liabilities.

"There is no economist consensus on the changing nature of UK inflation over the next five years, let alone for the decades over which pension benefits are paid, so the difficulty is obvious," said Warren Singer, principal at Mercer.

At end-March, FTSE 350 companies long-term assumptions for annual inflation ranged between 2.6 and 3.4 percent, Mercer said.

Liabilities reflect price inflation based on the nominal and inflation-linked bond yields issued by the UK government.

Singer said over the long term, it has been a "less than perfect measure", and "some downward adjustment" is necessary.

He also said The International Accounting Standards Board (IASB) is expected to ask companies to provide detailed information on "material risks" such as the uncertain UK inflation assumptions and their impact on pension liabilities in the notes to accounts.

Present rules do not oblige companies to offer such detail, although some do as part of best practice, Singer said.

The IASB is expected to publish its proposals in Q1 next year, but the changes would only be effective from 2013.

(Reporting by Cecilia Valente, Editing by John Stonestreet)